Car loan: flat rate or reducing rate?
Two similar-looking numbers can mean very different costs. The difference is how the interest is calculated — here it is with an example.
Last reviewed: 2026-10-04
Flat rate
Interest is charged on the full original amount for the whole term, even after you have paid much of it back.
Reducing rate
Interest is charged only on the balance still owed, so it falls with every payment. That is why a reducing rate with the same number is much cheaper.
Example: AED 100,000 over 5 years at 3% (an example, not an offer)
Estimated:
Monthly payment — 3% flatEstimatedAED 1,917
Total interest — 3% flatEstimatedAED 15,000
Total interest — 3% reducingEstimatedAED 7,812
Reducing rate equal to 3% flatEstimated5.64%
What to ask before you sign
Ask: is the rate flat or reducing? What is the total I will pay? What are the early-settlement, insurance and admin fees? Get the answers in writing.
This explains the arithmetic; it is not financial advice. The bank or finance company confirms the real figures.