Why a 7% flat rate can cost more than a 12% reducing rate

How a flat rate works

With a flat rate, interest is worked out on the full amount you borrow, for every year of the loan, even though you pay part of it back every month. On Rs. 1,000,000 at 7% flat for 5 years, the interest is Rs. 350,000, so you repay Rs. 22,500 a month.

How a reducing balance works

With a reducing balance, interest is charged only on what you still owe. As you pay the loan down, the interest shrinks. The rates on financing.lk are reducing-balance rates unless a lender says otherwise.

The comparison

Rs. 22,500 a month for 5 years on Rs. 1,000,000 is the same as a reducing-balance rate of about 12.6%. So a 12% reducing rate is actually cheaper than 7% flat.

The lowest leasing rate we list this week is 11.50% at Bank of Ceylon.

Try it with your numbers