Guide · Use with the APR / APY Interest Converter
Flat-Rate Loans: How to Find the Real Interest Rate
A personal loan quoted at "1% a month flat" sounds like a 12% loan. If you repay it in 12 equal monthly instalments, it actually costs about 21.5% a year. This guide explains where the gap comes from, shows you how to work out the real rate of any flat-rate or add-on loan, and how to compare it fairly with other offers.
What a flat rate is
With a flat rate (called an add-on rate in the Philippines), the lender works out the interest on the original amount you borrowed, for the whole term, and adds it on at the start. You then repay the borrowed amount plus all of that interest in equal instalments.
Most bank loans, mortgages and credit cards work differently. They charge interest on the reducing balance: only on what you still owe. As you repay, the interest shrinks. A flat-rate loan keeps charging the same interest every month, even when you owe only a small part of the original amount.
Why the real rate is so much higher
Take ฿100,000 borrowed at 1% a month flat for 12 months. The interest is ฿1,000 every month (1% of ฿100,000), and each instalment also repays ฿8,333.33 of the amount borrowed. Look at what that ฿1,000 means as the loan goes on:
| Month | Borrowed amount still owed | Interest charged | Interest as a share of what you owe |
|---|---|---|---|
| 1 | ฿100,000.00 | ฿1,000 | 1.0% |
| 6 | ฿58,333.33 | ฿1,000 | 1.7% |
| 12 | ฿8,333.33 | ฿1,000 | 12.0% |
Only the first month really costs 1%. On average you owe a little over half the original amount across the year, but you pay interest as if you owed all of it. That is why the true rate ends up close to double the flat rate.
How to work out the real rate
The real rate of an instalment loan is the interest rate that makes all your payments add up, in today's money, to exactly the amount you received. Lenders call it the effective interest rate (EIR). There is no neat formula for it, so it is found by trial, which a spreadsheet does for you.
Step 1: Work out the instalment
Instalment = (amount borrowed + total interest) ÷ number of months
Step 2: Find the monthly rate the instalments imply
In Excel, Google Sheets or LibreOffice, type:
This gives the real monthly rate. Multiply it by 12 to get the APR. The minus sign matters: it tells the spreadsheet that the instalments are money going out.
Step 3: Convert to APY
Enter the APR in the APR / APY converter with monthly compounding. It turns the figure into an APY (the effective annual rate), which you can then compare with any other loan or card.
Worked example: ฿100,000 at 1% a month flat for 12 months
| Step | Calculation | Result |
|---|---|---|
| Total interest | ฿100,000 × 1% × 12 | ฿12,000 |
| Instalment | (฿100,000 + ฿12,000) ÷ 12 | ฿9,333.33 a month |
| Real monthly rate | =RATE(12, −9333.33, 100000) | 1.788% |
| APR | 1.788% × 12 | 21.46% |
| APY | Enter 21.46, APR, Monthly in the converter | 23.702% |
So the "12%" loan costs 21.46% a year as an APR, or 23.70% once monthly compounding is counted. A bank personal loan at an 18% reducing-balance APR would be cheaper, even though 18 looks bigger than 12.
A longer term doesn't make it cheaper
People often assume that spreading a flat-rate loan over more months lowers the rate. It barely changes it, and the total interest grows in step with the term:
| Loan | Instalment | Total interest | Real APR | APY |
|---|---|---|---|---|
| ฿100,000, 1% flat, 12 months | ฿9,333.33 | ฿12,000 | 21.46% | 23.70% |
| ฿100,000, 1% flat, 24 months | ฿5,166.67 | ฿24,000 | 21.57% | 23.84% |
| ฿100,000, 1% flat, 36 months | ฿3,777.78 | ฿36,000 | 21.20% | 23.39% |
| ฿50,000, 1.5% flat, 12 months | ฿4,916.67 | ฿9,000 | 31.72% | 36.76% |
Up-front fees push the rate higher still
If the lender deducts a fee when the loan is paid out, you receive less but repay the same instalments. Say the ฿100,000 loan above has a ฿2,000 processing fee taken off at the start. You receive ฿98,000, so in Step 2 you enter 98000 instead of 100000. The real monthly rate becomes 2.117%, an APR of 25.40%, or 28.58% as an APY.
The same method works for "0% interest" instalment plans that charge a fee. A ฿30,000 purchase split into six payments of ฿5,000, with a ฿900 fee paid up front, means you really borrow ฿29,100 and repay ฿30,000. That works out to an APR of about 10.5%: not zero, though much cheaper than the flat-rate loans above.
What lenders must tell you
Rules differ by country. These are the ones we checked against each regulator's own documents in October 2026.
- Thailand. Under the Bank of Thailand's Notification No. 3/2568 on Responsible Lending (31 January 2025), loan advertisements must show the effective interest rate as a range from the minimum to the maximum, and lenders must tell you the annual effective rate range during the sale. If an advert or salesperson only gives you a flat rate, ask for the effective rate.
- Philippines. The Truth in Lending Act (Republic Act No. 3765) and the BSP's Manual of Regulations for Banks, Section 306 require banks to give you a written disclosure before the loan is completed, showing the finance charges in pesos and the rate as a simple annual rate or an EIR. For credit cards, BSP Circular No. 1165 (2023) caps interest at 36% a year and the monthly add-on rate on instalment plans at 1%. As the worked example shows, a 12-month plan at the full 1% add-on works out to about 21.5% a year.
- Indonesia. Since 1 January 2025, OJK has capped the daily "economic benefit" that licensed online lenders (pinjaman daring) can charge on consumer loans at 0.3% a day for terms under six months and 0.2% a day for longer terms (OJK press release, December 2024, restated in May 2025). These are caps, not typical prices, and they are still very high: 0.2% a day is 73% a year before any compounding, and 0.3% a day is 109.5%. That is above the converter's 100% limit, which is a warning sign in itself.
For Vietnam we couldn't confirm the current rules from a State Bank of Vietnam source, so we don't quote any here. Wherever you borrow, ask for the effective annual rate in writing and compare offers on that figure.
Common mistakes
- Comparing a flat rate with a reducing-balance rate. "1% a month flat" and "12% a year" from a bank are not the same price. Convert the flat rate first.
- Multiplying the flat rate by 12 and stopping there. That gives 12%, which understates the cost by almost half.
- Ignoring up-front fees. Use the amount you actually receive in the RATE formula, not the headline loan amount.
- Assuming early repayment saves the interest. Flat-rate contracts often calculate early settlement in their own way. Ask the lender for the payoff amount in writing before you decide.
Questions people ask
Is a flat-rate loan always worse than a reducing-balance loan?
No. Compare the effective rates. A flat-rate loan whose real APR works out lower than the alternative is the cheaper loan. The flat rate itself just can't tell you that.
Can I enter a flat rate straight into the converter?
No. The converter assumes interest is charged on the balance you owe. Work out the real APR with the steps above first, then enter that as an APR with monthly compounding.
What if I don't have a spreadsheet?
A rough rule: a flat rate repaid in equal monthly instalments over one to three years costs a little under twice the flat annual rate. For an exact figure, ask the lender for the EIR, which banks in Thailand and the Philippines must give you.
Related tools and guides
- APR / APY Interest Converter: compare two loan or savings rates on the same footing.
- Compound interest explained: why compounding frequency changes the real rate.
Sources
- Bank of Thailand, Notification No. 3/2568, Regulations on Responsible Lending (31 January 2025)
- Bangko Sentral ng Pilipinas, MORB Section 306, Truth in Lending Act disclosure requirement
- Bangko Sentral ng Pilipinas, Circular No. 1165, Series of 2023 (credit card interest ceiling)
- OJK press release SP-214/GKPB/OJK/XII/2024 (31 December 2024) and SP 76/OJK/GKPB/V/2025 (20 May 2025), caps for 2025 onward
The amounts in this guide are worked examples, not offers from any lender. Regulations change; check the regulator's current rules and your loan contract before you sign. This guide explains how loan pricing works. It is not financial or legal advice. How we check our calculations.