So what is a flat-rate loan?
I maybe teaching grandmother to suck eggs by defining a flat-rate loan. But I will error on the side of caution and explain it nonetheless. A flat-rate loan is a loan in which total interest payment is determined at the beginning of the loan based on the total principle. Therefore the effective interest on a flat rate is higher than a loan based on periodic-rest, all else equal. Nothing beats a concrete example. So we will use the below loan details to understand the payment for a flat-rate loan.- Loan Quantum = S$20,000
- Loan Tenure = 3 years
- Interest Rate = 10% p.a.
Finding the interest rate on a flat-rate loan
Ok, so now that we have settled on what is a flat-rate loan. Next we will move onto learning the computation of the ENR (equivalent nominal rate) per annum and effective interest rate per annum. As loans come in different types (for example a flat rate versus a periodic-rest) and even within the same type there can be differences in the annual payment frequency or the mode of payment (annuity-immediate versus annuity-due); hence to compare the true cost between these loans we need to standardise the interest rates. This is where the ENR (equivalent nominal rate) per annum and effective interest rate per annum come in. (The subject of annuity-immediate and annuity-due will be discussed in future articles. For this piece and previous ones, I have always assumed the case of annuity-immediate.) Using the same example as earlier- Loan Quantum = S$20,000
- Loan Tenure = 3 years
- Interest Rate = 10% p.a.
Table 1
Payment Frequency Per Year | Total Number of Payment Periods | Payment Per Period ($) |
Monthly |
36 |
722.22 |
Quarterly |
12 |
2,166.67 |
Semi-annual |
6 |
4,333.33 |
Annual |
3 |
8,666.67 |
Table 2: Excel Syntax for ENR
Syntax | |
Monthly | =12* RATE (36, 722.22, -20000) |
Quarterly | =4* RATE (12, 2166.67, -20000) |
Semi-annual | =2* RATE (6, 4333.33, -20000) |
Annual | =1* RATE (3, 8666.67, -20000) |
Table 3
Effective Rates (%) | |
Monthly | 19.46 |
Quarterly | 18.28 |
Semi-annual | 16.76 |
Annual | 14.36 |
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