Contents
- What a flat rate actually means
- A worked example: RM 20,000 at 5% flat over 3 years
- Why the gap is so large
- Rule of thumb: roughly double, minus a little
- Going the other way: our rates as flat rates
- Comparing two real offers side by side
- What the legal ceiling looks like as an effective rate
- Early settlement: where flat rates hurt again
- Common mistakes when comparing rates
- Comparing offers fairly: a checklist
- What to ask a lender
- Summary
"Personal loan from 4.99% flat." You have probably seen an advert like this. A flat rate is a common way to quote personal loans in Malaysia, and car hire purchase is usually quoted the same way. (BNM has announced that, from 2027, banks will have to stop using flat-rate and Rule of 78 calculations for personal financing, but flat-rate quotes are still common until then.) The number is small enough to look like a bargain. The trouble is that a flat rate and an annual rate on a reducing balance are not the same kind of number. Comparing them directly is like comparing a price per kilo with a price per piece. This guide explains what a flat rate really measures, shows how to convert it into an effective annual rate, and gives you tools to compare offers fairly, in a shop, on the phone or on WhatsApp.
What a flat rate actually means
With a flat rate, interest is worked out once, on the original loan amount, for the full term:
- Total interest = loan amount × flat rate × number of years
- Monthly instalment = (loan amount + total interest) ÷ number of months
The key word is "original". Every month you repay part of the principal, so the amount you actually owe keeps going down, but the interest charge stays the same as if you still owed the whole amount. See the glossary entry on flat rate for a short definition.
With a reducing-balance rate (also called the effective rate), interest each month is charged only on what you still owe. As the balance shrinks, so does the interest. This is how AXAI Credit prices its instalment loans: equal monthly instalments, with each month's interest worked out as the outstanding balance × annual rate ÷ 12. If you want a refresher on how annual, monthly and daily rates relate, see annual, monthly and daily rates explained.
A worked example: RM 20,000 at 5% flat over 3 years
Suppose a lender offers RM 20,000 over 36 months at 5% flat.
- Total interest = RM 20,000 × 5% × 3 = RM 3,000
- Monthly instalment = (RM 20,000 + RM 3,000) ÷ 36 ≈ RM 638.89
Now compare that with a loan of the same size and term at a true 5% p.a. on a reducing balance:
| Loan RM 20,000, 36 months | 5% flat | 5% p.a. reducing balance |
|---|---|---|
| Monthly instalment | ≈ RM 638.89 | ≈ RM 599.42 |
| Total interest | RM 3,000.00 | ≈ RM 1,579.03 |
| Effective annual rate | ≈ 9.31% | 5% |
Same headline number, but the flat-rate loan costs about RM 1,421 more in interest. To find the effective rate, we ask: what annual rate on a reducing balance would give the same monthly instalment of RM 638.89? The answer is about 9.31% p.a. In other words, "5% flat" over three years is really a loan at roughly 9.3% a year.
Why the gap is so large
Think of the flat-rate loan as RM 555.56 of principal plus RM 83.33 of interest every month (RM 20,000 ÷ 36 and RM 3,000 ÷ 36). The interest part never changes, but the amount you owe does:
| Point in the loan | Principal still owed | Monthly interest | Interest as an annual rate on what you owe |
|---|---|---|---|
| Month 1 | RM 20,000.00 | RM 83.33 | 5% |
| Month 25 | ≈ RM 6,666.67 | RM 83.33 | 15% |
| Month 36 | ≈ RM 555.56 | RM 83.33 | 180% |
At the start, you really are paying 5% a year. By the third year, you owe only a third of the original amount but are still paying interest as if you owed all of it. In the final month you pay RM 83.33 of interest to borrow about RM 555, which is 15% for that one month. The effective rate is simply the fair average of all of this across the life of the loan.
Rule of thumb: roughly double, minus a little
You don't need a spreadsheet to sense-check a flat rate. For terms of one to three years, the effective annual rate is roughly 1.8 to 1.9 times the flat rate. Here is what that looks like on a RM 10,000 loan:
| Flat rate | 12 months | 24 months | 36 months |
|---|---|---|---|
| 3% | ≈ 5.49% | ≈ 5.66% | ≈ 5.68% |
| 4% | ≈ 7.30% | ≈ 7.50% | ≈ 7.51% |
| 5% | ≈ 9.10% | ≈ 9.32% | ≈ 9.31% |
| 6% | ≈ 10.90% | ≈ 11.13% | ≈ 11.08% |
| 8% | ≈ 14.45% | ≈ 14.68% | ≈ 14.55% |
| 10% | ≈ 17.97% | ≈ 18.16% | ≈ 17.92% |
So when you hear "6% flat", think "about 11% a year". When you hear "8% flat", think "about 14.5% a year". The multiple does not depend on the loan amount, only on the flat rate and the term.
For a quick mental check, you can also use: effective rate ≈ flat rate × 2n ÷ (n + 1), where n is the number of monthly instalments. It slightly overstates the true figure (for example, it gives about 9.7% instead of 9.31% for 5% flat over 36 months), but it puts you in the right range in seconds. For an exact answer, use our flat-rate converter.
Going the other way: our rates as flat rates
Sometimes you have a flat-rate quote in one hand and a reducing-balance quote in the other, and it helps to translate in the opposite direction. One simple way is to take the total interest on a reducing-balance loan and express it as a flat rate: total interest ÷ loan amount ÷ years. On RM 10,000:
| Our term and rate | Total interest on RM 10,000 | Same cost expressed as a flat rate |
|---|---|---|
| 12 months at 4.9% p.a. | ≈ RM 267.40 | ≈ 2.67% flat |
| 24 months at 4.9% p.a. | ≈ RM 518.37 | ≈ 2.59% flat |
| 36 months at 4.9% p.a. | ≈ RM 773.38 | ≈ 2.58% flat |
| 60 months at 4.9% p.a. | ≈ RM 1,295.32 | ≈ 2.59% flat |
So a 12-month loan at 4.9% p.a. on a reducing balance costs about the same as a "2.67% flat" offer. If someone offers you 4.99% flat over 12 months, that is much more expensive, even though 4.99 looks almost the same as 4.9. Because 4.9% p.a. is our rate for every term, the longer terms in the table work out at about 2.6% flat.
Comparing two real offers side by side
Here is an honest comparison on RM 20,000, using our personal loan rate against "5% flat", "3% flat" and "2.5% flat" offers. Every approved customer pays our 4.9% a year; other lenders' rates may depend on your profile, so this assumes you get their headline rate.
| RM 20,000 | Monthly instalment | Total interest | Effective rate |
|---|---|---|---|
| 5% flat, 24 months | ≈ RM 916.67 | RM 2,000.00 | ≈ 9.32% |
| AXAI Credit, 24 months at 4.9% p.a. | ≈ RM 876.53 | ≈ RM 1,036.76 | 4.9% |
| 5% flat, 36 months | ≈ RM 638.89 | RM 3,000.00 | ≈ 9.31% |
| 3% flat, 36 months | ≈ RM 605.56 | RM 1,800.00 | ≈ 5.68% |
| 2.5% flat, 36 months | ≈ RM 597.22 | RM 1,500.00 | ≈ 4.75% |
| AXAI Credit, 36 months at 4.9% p.a. | ≈ RM 598.52 | ≈ RM 1,546.73 | 4.9% |
Against 5% flat, our loan costs about RM 963.24 less in interest over 24 months and about RM 1,453.27 less over 36 months. Against 3% flat over 36 months, ours is also cheaper, by about RM 253.27. Against 2.5% flat over 36 months, the answer flips: the flat-rate offer is about RM 46.73 cheaper than ours, before any fees. The point is not which lender wins; it is that you can only see this once both offers are on the same basis. Then add the fees and the early settlement terms, which can change the answer again.
What the legal ceiling looks like as an effective rate
For licensed moneylenders in Malaysia, the Moneylenders Act 1951 (section 17A) caps interest at 18% a year on unsecured loans and 12% a year on secured loans. The law doesn't set a reducing-balance formula. In practice the cap is applied as a flat rate on the original loan amount for the whole term, and the courts have accepted this. So the ceiling for an unsecured loan is 18% flat, not 18% on a reducing balance.
Converted to an effective rate, that ceiling is much higher than it sounds. On RM 10,000:
| At the cap: 18% flat | 12 months | 24 months | 36 months |
|---|---|---|---|
| Monthly instalment | ≈ RM 983.33 | ≈ RM 566.67 | ≈ RM 427.78 |
| Total interest | RM 1,800.00 | RM 3,600.00 | RM 5,400.00 |
| Effective annual rate | ≈ 31.72% | ≈ 31.46% | ≈ 30.59% |
Two practical points follow. To check an offer against the cap, compare like with like: a flat rate (or "1.5% a month on the original amount") of more than 18% a year is above the ceiling. And being within the cap says nothing about value: a loan at 10% flat is legal, but it costs about 18% a year in effective terms, more than three and a half times our 4.9% p.a. If a lender quotes "only RM 5 a day", ask for the flat rate and the total interest in writing, then convert both ways.
Early settlement: where flat rates hurt again
With a reducing-balance loan, interest stops on the money you have repaid. If you settle early with us, you pay the remaining principal plus interest for the days since your last due date (annual rate ÷ 360 per day); settle right after an instalment and there is no extra interest at all. There is no early settlement penalty, and our early settlement calculator shows the saving.
With a flat-rate loan, the total interest has been fixed up front for the whole term. How much of it you get back if you settle early depends on the formula in your agreement, and it is not always a simple pro-rata refund. Some lenders use the "Rule of 78", which front-loads interest so less is refunded on early settlement; for licensed moneylenders, the courts have accepted methods like this where the agreement doesn't say otherwise. Before signing a flat-rate loan, ask for the settlement amount at, say, month 12 in writing, so you can see what early repayment would really save.
Common mistakes when comparing rates
- Comparing a flat rate with an annual rate directly. 5% flat is not cheaper than 9% p.a.; it may be more expensive.
- Comparing instalments over different terms. A lower instalment over a longer term can cost more in total.
- Forgetting fees. Processing, stamping, insurance or "admin" fees all raise the real cost, especially if they are deducted from the payout.
- Ignoring the payout amount. If RM 20,000 is approved but only RM 19,000 reaches your account, you are paying interest on money you never received. With AXAI Credit nothing is deducted from the payout.
- Assuming the advertised rate is yours. "From" means the lowest rate available. Compare the rate in your actual offer.
Comparing offers fairly: a checklist
When you have two or three offers on the table, line them up on the same basis:
- Convert every flat rate to an effective annual rate. The flat-rate converter mentioned above does this in one step.
- Compare the monthly instalment and the total repaid for the same amount and term. The lower effective rate will show up as lower total interest.
- Add any fees and note whether anything is deducted from the payout. AXAI Credit charges no processing or admin fees, so the interest is the cost of borrowing when you repay on time.
- Check the legal ceiling, flat against flat. For an unsecured loan from a licensed moneylender, the flat rate must not be above 18% a year. Remember that 18% flat is about 31% to 32% a year effective, so a rate can be legal and still expensive.
- Ask what happens if you settle early, and get an example figure.
- Check the lender is licensed. Our guide on how to check a moneylender is licensed shows how.
You can then run the reducing-balance figures through the calculator on our rates page to see the repayment schedule.
What to ask a lender
If an offer is quoted only as a flat rate, or as "just RM X a day", it is reasonable to ask:
- What is the effective annual rate on a reducing balance?
- Is interest charged on the original amount or the remaining balance?
- Can I see the full repayment schedule, month by month, before I sign?
- Are there fees on top of interest, is anything deducted from the payout, and what are the late payment charges?
- If I settle early after 12 months, how much would I pay?
A licensed lender should be able to answer all of these clearly. If the answers are vague, or you are pressured to decide on the spot, take that as a reason to slow down. Our guide on spotting loan scams lists other warning signs.
Summary
A flat rate charges interest on the original loan amount for the full term, so the effective annual rate on a reducing balance is close to double the headline figure: about 9.31% for 5% flat over 36 months, and about 11% for 6% flat. Going the other way, our 4.9% p.a. over 12 months costs about the same as 2.67% flat. Once offers are on the same basis, the cheaper one is easy to see, and it isn't always the one with the smaller number. Convert every flat rate, compare total interest, add fees and check early settlement terms. AXAI Credit quotes rates on a reducing balance (personal loans at 4.9% p.a. for every term from 3 to 108 months), so the rate you see is already the effective rate. If you would like help comparing an offer, call 011-2102 9366.
This article is general information only and is not personal financial advice. Approval and loan amounts are subject to assessment and your loan agreement. How we write and check our guides
