2. Cost of a loan – Compound vs Flat Interest
Be Careful
10% Compound
10% Flat Interest ≠ Interest
Financial Institution
often quote either or both
to confuse
YOU
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3. Cost of a loan – Compound vs Flat Interest
Annual Interest Rates
Reducible Equivalent Flat Interest Rate %
Rate % 1 yr 2 yr 3 yr 20 yr 25 yr
6 3.28 3.18 3.17 … 3.60 3.73
7 3.83 3.73 3.72 … 4.30 4.48
8 4.39 4.27 4.27 … 5.04 5.26
9 4.94 4.83 4.83 … 5.80 6.07
10 5.50 5.37 5.39 … 6.58 6.90
11 6.06 5.93 5.95 … 7.39 7.76
12 6.62 6.49 6.52 … 8.21 8.64 Best
A Bank offers a loan for 20 years at 10% reducible.
A Credit Union offers a loan for 20 years at 8% Flat.
Which is best?
10% Reducible = 6.58% Flat
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4. Cost of a loan – Compound vs Flat Interest
Annual Interest Rates
Reducible Equivalent Flat Interest Rate %
Rate % 1 yr 2 yr 3 yr 20 yr 25 yr
6 3.28 3.18 3.17 … 3.60 3.73
7 3.83 3.73 3.72 … 4.30 4.48
8 4.39 4.27 4.27 … 5.04 5.26
9 4.94 4.83 4.83 … 5.80 6.07
10 5.50 5.37 5.39 … 6.58 6.90
11 6.06 5.93 5.95 … 7.39 7.76
12 6.62 6.49 6.52 … 8.21 8.64
A Bank offers a loan for 20 years at 7% reducible.
A Credit Union offers a loan for 20 years at 4% Flat.
Which is best? Best
7% Reducible = 4.3% Flat
4
5. Cost of a loan – Compound vs Flat Interest
Annual Interest Rates
Reducible Equivalent Flat Interest Rate %
Rate % 1 yr 2 yr 3 yr 20 yr 25 yr
6 3.28 3.18 3.17 … 3.60 3.73
7 3.83 3.73 3.72 … 4.30 4.48
8 4.39 4.27 4.27 … 5.04 5.26
9 4.94 4.83 4.83 … 5.80 6.07
10 5.50 5.37 5.39 … 6.58 6.90
11 6.06 5.93 5.95 … 7.39 7.76
12 6.62 6.49 6.52 … 8.21 8.64
Equal
A Bank offers a loan for 20 years at 12% reducible.
A Credit Union offers a loan for 20 years at 8.21% Flat.
Which is best? Equal
7% Reducible = 8.21% Flat
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6. Cost of a loan – Monthly Repayments
Reducible Monthly Payment per $1000
Rate % 1 yr 2 yr 3 yr 20 yr 25 yr
6 88.07 44.32 30.42 … 7.16 6.44
7 86.53 44.77 30.88 … 7.75 7.07
8 86.99 45.23 31.34 … 8.36 7.72
9 87.45 45.68 31.80 … 9.00 8.39
10 87.92 46.14 32.27 … 9.65 9.09
11 88.38 46.61 32.74 … 10.32 9.80
12 88.85 47.07 33.21 … 11.01 10.53
A Bank offers a $110,000 loan for 20 years at 11% reducible.
Monthly Repayment = 110 x $10.53
Thousands
= $1158.30 per month.
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7. Cost of a loan – Monthly Repayments
Reducible Monthly Payment per $1000
Rate % 1 yr 2 yr 3 yr 20 yr 25 yr
6 88.07 44.32 30.42 … 7.16 6.44
7 86.53 44.77 30.88 … 7.75 7.07
8 86.99 45.23 31.34 … 8.36 7.72
9 87.45 45.68 31.80 … 9.00 8.39
10 87.92 46.14 32.27 … 9.65 9.09
11 88.38 46.61 32.74 … 10.32 9.80
12 88.85 47.07 33.21 … 11.01 10.53
A Bank offers a $120,000 loan for 25 years at 9% reducible.
Monthly Repayment = 120 x $8.39
Thousands
= $1006.80 per month.
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