Personal Finance
Fixed Rate vs Reducing Rate: What Malaysian Borrowers Need to Know
Understand the real difference between flat and reducing balance interest rates so you can compare loan offers accurately.
When comparing personal loan offers in Malaysia, you'll encounter two types of interest rates: flat rate (also called fixed rate) and reducing balance rate (also called effective rate). Understanding the difference can save you thousands of ringgit.
What Is a Flat Rate?
A flat rate calculates interest on the original loan amount for the entire tenure. If you borrow RM 50,000 at 6% flat rate for 5 years:
- Total interest = RM 50,000 × 6% × 5 = RM 15,000
- Total repayment = RM 65,000
- Monthly instalment = RM 65,000 ÷ 60 = RM 1,083
The interest doesn't decrease even though you're paying down the principal every month. Most Malaysian personal loans use flat rates.
What Is a Reducing Balance Rate?
A reducing balance rate calculates interest on the outstanding balance each month. As you pay down the principal, the interest charged decreases. Housing loans and some Islamic financing products use this method.
For the same RM 50,000 loan, a reducing rate of 6% would result in significantly less total interest — approximately RM 8,000 over 5 years instead of RM 15,000.
The Conversion Formula
To compare apples to apples, you can convert a flat rate to its approximate effective rate:
Effective Rate ≈ Flat Rate × 1.8 to 2.0 (depending on tenure)
So a 6% flat rate is roughly equivalent to an 11–12% effective rate. This is why personal loans advertised at "6% flat" are actually more expensive than they first appear compared to a housing loan at 4.5% effective.
A more precise formula is:
Effective Rate ≈ (2 × n × Flat Rate) / (n + 1)
Where n is the number of years. For a 5-year loan at 6% flat: (2 × 5 × 6%) / (5 + 1) = 10% effective rate.
Why This Matters
When a bank offers you "5.5% flat rate" and another offers "10% reducing rate," they might be almost identical in actual cost. Without understanding this distinction, you could pick the wrong offer.
Quick Comparison Table
| Flat Rate | Approx. Effective Rate (5-year) |
|---|---|
| 4.0% | ~6.7% |
| 5.5% | ~9.2% |
| 6.0% | ~10.0% |
| 7.0% | ~11.7% |
| 8.0% | ~13.3% |
Always ask the bank for the effective/annualised rate so you can compare offers from different lenders on the same basis.
Next step: Try pinjamHub's loan calculator to see both the flat and effective cost of any loan amount and tenure.
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