Flat Interest Rate vs. Effective Interest Rate: Which Should We Choose?

[Suba]

Learning financial literacy isn't just about income and profit; we also need to understand risks and loans. Learning about loan interest doesn't mean we have to take out a loan, but perhaps this knowledge will be useful to our friends and relatives in the future.

Flat interest is calculated based on the initial principal, so the amount remains constant plus monthly installments until the loan is paid off. Effective interest, on the other hand, is calculated based on the remaining outstanding principal each month, so the interest payments plus installments will decrease each month until the debt is paid off.

The application of flat interest rates and effective interest rates to long-term loans, or loans lasting more than three years, will certainly impact the amount of interest paid. So, which do you think is better, given the lower interest payments?

 

[Kross]

I would prefer a flat interest rate over a variable interest rate. That implies that the yield is predictable from the beginning.

 

[Augusta]

I would prefer the effective interest, as Interest is calculated based on the remaining outstanding principal each month, so the interest payments plus installments will decrease each month.