Flat Rate (finance)

Flat Rate (finance)

Flat interest rate loans are often used by traditional moneylenders in the informal economy of developing countries. They are also used by many microfinance institutions. One reason for their popularity is their ease of use. For example, a loan of $1,200 can be structured with 12 monthly repayments of $100, plus interest, due on the same dates, of 1% ($12) a month, resulting in a total monthly payment of $112. In the example to the right, the loan contract is for 400,000 Cambodian riels over 4 months. Interest is set at 16,000 riels (4%) a month while principal is due in a single payment at the end.

Flat rate calculations, which are based on the amount of money the borrower receives at the beginning of the loan rather the average amount the borrower has access to during the loan, have been outlawed in developed countries (see for example the Truth in Lending Act). However, they persist in many developing countries, and have frequently been adopted by microcredit institutions.

For a variety of reasons (see below), flat rates can be useful in lending to poor people, and often disappear very slowly as financial systems develop.

Read more about Flat Rate (finance):  Flat Rate Calculations, Benefits of Flat Rate Lending, Problems With Flat Rate Lending, Towards Consumer Protection in Borrowing, See Also

Other related articles:

Flat Rate (finance) - See Also
... Annual percentage rate Flat rate Interest Microfinance Truth in Lending Act. ...

Famous quotes containing the words flat and/or rate:

    But pardon, gentles all,
    The flat unraised spirits that hath dared
    On this unworthy scaffold to bring forth
    So great an object.
    William Shakespeare (1564–1616)

    Whoever thinks his friend more important than his country, I rate him nowhere.
    Sophocles (497–406/5 B.C.)