Why “20% extra” doesn’t mean 20% interest
Shops and installment companies usually quote a “flat” percentage on the whole amount, such as “20% extra over a year”. But you repay part of the amount every month, so by the end of the year you owe very little, yet the extra was charged on the full amount for the whole period. That’s why the true (reducing-balance) rate is roughly double the advertised flat rate.
Example: a phone costs 10,000 cash, or 1,000 a month for 12 months. The extra is 2,000, i.e. 20%, but the true rate is about 35% a year.
How to use the result
- Compare with bank loans: if a personal loan has a lower reducing rate, it is cheaper than this installment plan.
- Compare with deposit returns: if you have the cash and the return on a fixed deposit is lower than the true rate, paying cash usually saves money.
- Really “interest-free”? If the down payment plus installments equal the cash price, there is no extra. But ask for the real cash price, since some shops give a cash discount that isn’t offered with installments.
Frequently Asked Questions
What is the difference between flat and reducing rates?
A flat rate is charged on the original amount for the whole term. A reducing rate is charged only on what you still owe, so it shrinks with every payment. Banks usually quote reducing rates and shops quote flat ones, so the calculator converts both to the same measure.
Why should I enter upfront fees?
They are part of the real cost. A 5% admin fee, for example, can raise the true rate a lot, especially over short terms.
Is this the same rate as in the loan calculator?
Yes, it is the same method. You can check it: enter the financed amount (cash price minus down payment), the rate found here and the number of months in our loan calculator, and you will get about the same installment.