flat interest
Interest calculated on the original loan principal throughout the tenor.
What it means
Flat interest is a method of calculating interest based on the original loan principal for the entire credit period. The monthly interest amount does not change even though the loan principal has decreased. This method is often used for short-term credit such as vehicle loans or unsecured loans.
Why it matters for families
Flat interest makes installments easy to predict, but total interest can be larger than effective interest at the same rate. Families need to know this method so they do not compare offers incorrectly. Misunderstanding can make families feel they got cheap interest when the total cost is actually higher.
Example
For example, a Rp60 million loan with 12 percent flat interest per year for two years. Interest is calculated on Rp60 million throughout the period, so total interest is about Rp14.4 million. The monthly installment stays the same until paid off.
Common misunderstanding
Many think 12 percent flat interest is equivalent to 12 percent effective interest. In reality, flat interest is calculated on the original principal, so the actual cost is higher.