Reading a loan offer: flat rate vs reducing balance

5 min read · Before you start: Beginner lessons on debt and interest · Updated 26 October 2026

Key terms in this lesson: stamp duty · Flat rate · Reducing balance (all defined in the glossary)

Two lenders offer you the same loan. One quotes 5 percent, the other 9 percent. The 5 percent offer sounds cheaper. It might not be. The reason is how the percentage is applied, and many people sign without ever asking.

Two ways to charge interest

Flat rate: interest is worked out once on the full amount you borrowed, for the whole term, and added on top. You then repay the total in equal instalments. The interest is calculated as if you never paid anything back.
Reducing balance: interest is worked out each month on what you still owe. As you pay down the loan, the interest part of each payment shrinks.

With a flat rate you keep paying interest on money you have already returned. That is why a flat rate always costs more than the same number quoted as a reducing-balance rate.

A worked example

Borrow TT$50,000 over 5 years (60 monthly payments).

Offer	Monthly payment	Total interest
5% flat	TT$1,041.67	TT$12,500
9% reducing balance	TT$1,037.92	TT$12,275
9% flat	TT$1,208.33	TT$22,500

The "5 percent" offer costs almost exactly the same as a 9 percent reducing-balance loan. In other words, 5 percent flat over five years is roughly a 9.2 percent yearly rate on a reducing balance. And 9 percent flat is roughly 15.7 percent on a reducing balance. Check any offer yourself with the loan payment calculator, which uses reducing balance.

Rule of thumb: over several years, a flat rate is often close to double the same number on a reducing balance. The longer the loan, the bigger the gap.

The number that lets you compare: total cost

A rate alone never tells the whole story. Ask the lender for three figures in writing:

The monthly payment.
The total you will repay over the whole term.
The annual percentage rate (APR) or true yearly cost, which should include fees. A lender should be able to tell you how it was worked out.

Then compare offers on total repaid, not on the headline rate. A shorter loan has a higher payment but costs much less in interest.

Fees and extras to look for

Processing, application or valuation fees.
Legal fees and stamp duty on secured loans.
Insurance you are asked to buy with the loan, and whether you must buy it from the lender.
Penalties for paying early, and how any unearned interest is credited back if you do.
Late-payment charges, and whether the rate can change during the loan.

Common mistakes

Choosing the lowest monthly payment. A longer term lowers the payment and raises the total cost.
Comparing a flat rate from one lender with a reducing rate from another.
Not asking about early repayment until you want to clear the loan.
Signing before reading the final agreement. Documents with blank spaces are a warning sign, and many people ask for them to be completed before signing.

Try this

Take a loan offer you have seen or been given. Write down the amount, the term, the monthly payment and the total repaid. Multiply the monthly payment by the number of months. If that total is much more than the borrowed amount plus the interest you expected, ask the lender to explain the difference.

Key ideas: Useful questions to ask: is the rate flat or reducing? What is the total repaid, and the APR? Which fees apply? What happens on early repayment?

Where sources differ, go to the source. Quoted rates, effective rates and total repayable are different figures, and fees are not always included in the headline rate. The signed agreement and the lender's published schedule are the record. Read them and decide for yourself what applies to you. Useful places: Central Bank of Trinidad and Tobago, and the lenders you are comparing.

Test yourself

Quick check 1 of 3

At the same quoted percentage, which usually costs more over several years?

Quick check 2 of 3

In the example, 5 percent flat over 5 years is roughly the same as which reducing-balance rate?

Quick check 3 of 3

Which is the best way to compare two loan offers?

Not financial advice. This lesson is general education only. See our editorial policy and disclaimer.