Flat rate vs reducing rate, explained
Updated
How do I convert a flat rate to a reducing rate?
First work out the flat-rate instalment: (amount + amount × flat rate × years) ÷ months. Then find the yearly rate at which that same instalment repays the loan on the reducing balance, where EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1): AED 100,000 at 3.49% flat over 48 months is AED 2,374.17 a month, which is 6.56% a year on the reducing balance. That second step has no one-line formula, so a calculator solves it; the 1.8–1.9 times rule of thumb only comes close.
| 3.49% flat | 3.49% reducing | |
|---|---|---|
| Interest | P × R × T = 100,000 × 3.49% × 4 = AED 13,960 | AED 7,287 (charged on what is still owed) |
| Monthly instalment | (100,000 + interest) ÷ 48 = AED 2,374.17 | EMI formula = AED 2,235.16 |
| Everything you repay | AED 113,960 | AED 107,287 |
| Real yearly rate | 6.56% | 3.49% |
Official rule: Banks must calculate interest on the reducing balance, using a 365-day year. (source, checked 2026-10-19)
Not a valid document. Estimate for information only — not financial advice, not an offer of credit and not a bank document. Errors are possible. Only your bank's or finance company's official offer letter, contract and statements are binding.
The single most useful thing to know about loans in the UAE: a flat rate and a reducing rate with the same number are very different loans.
The flat rate
Interest is charged on the full amount you borrowed, every year, until the end — even though you repay part of it each month. Interest = amount × rate × years.
The reducing rate
Interest is charged only on what you still owe. Each month the balance falls, so the interest falls too. This is how the Central Bank requires banks to actually calculate interest.
AED 100,000 over 4 years at 3.49% flat: interest = 100,000 × 3.49% × 4 = AED 13,960; instalment AED 2,374.17. The same instalment on a reducing balance is 6.56% a year.
Rule of thumb
For 2–5 year loans at flat rates between 2.5% and 5%, the real rate is about 1.8 to 1.9 times the flat rate. Use the flat rate converter for your exact number.
Islamic finance
Islamic banks quote a profit rate instead of interest and use different contracts (for example murabaha for cars), but the same disclosure rules apply and the monthly maths works the same way. Treat a profit rate exactly like an interest rate — and check whether it is flat or reducing. More in Islamic finance: the profit rate.
Questions people ask
What is the difference between a flat rate and a reducing rate?
A flat rate charges interest on the full amount you borrowed for the whole term, even though you repay part of it every month. A reducing rate charges interest only on what you still owe. With the same number, the flat-rate loan costs far more.
Must UAE banks show the reducing rate?
Yes — in the UAE, the Central Bank requires banks to calculate interest on the reducing balance, and a bank advertising a flat rate must show the equivalent effective (reducing) rate next to it.
How to calculate reducing rate to flat rate?
Work out the monthly instalment on the reducing balance with the EMI formula, multiply it by the number of months, take away the amount borrowed, and divide that interest by the amount and by the number of years. 6.56% reducing over 48 months comes back to 3.49% flat.
How to convert flat rate to effective rate?
The effective (reducing) rate is the yearly rate at which the flat-rate instalment would repay the same loan on the reducing balance. 3.49% flat over 48 months is 6.56% effective. UAE banks must show it next to any flat rate they advertise; the APR in your Key Facts Statement also adds the fees.
Which is better, flat rate or reducing rate?
Neither on its own in the UAE: the same loan can be quoted either way. What matters is the reducing rate, because a flat rate with the same number is a much dearer loan — 3.49% flat over 4 years costs as much as 6.56% reducing. Compare offers on the reducing rate plus fees.