Reducing Balance vs. Flat Rate Interest

Under reducing balance (the standard method for home and most personal loans), interest each month is calculated only on what's still outstanding - as you repay principal, the interest charged shrinks accordingly. Under flat rate (common in some vehicle and consumer durable loans), interest is calculated on the original loan amount for the entire tenure, even though you're steadily repaying it down - meaning a flat rate of, say, 8% typically works out to a meaningfully higher effective annual rate than 8% reducing balance. Always ask which method applies, since the same stated percentage can mean very different real costs.