Don’t be fooled.

Don’t be fooled.

Are the loan rates on the billboards and banners really the rates you end up paying?

January 13, 2013 3:24 by kippreport

Most people I have met to date are confused about flat and reducing balance interest rates. When I first moved to Dubai, I was one of those who got caught into the trap of low interest rate advertised until I realised I was effectively paying more than what I had signed up for.

What is the difference between flat and reducing balance interest rates?

Loan rates offered by UAE Banks can differ quite a bit and come in a wide range from 2.99% to 23% of the loan amount. Why such a broad range?

There are two ways of calculating the interest rate on your loan, Flat and Reducing balance. Flat rates are usually lower and it simply calculates the interest on the entire loan amount without considering the amount already paid off. For example, if you take a loan of AED 10,000 at a flat rate of 10% p.a. over 5 years your total interest would be AED 5,000 (10,000*10%*5). On the other hand, a reducing balance rate calculates the interest on the outstanding balance of your loan which means you pay interest on the amount left to be paid off.

Here is an example. What would you choose between 24 percent vs. 18 percent rate – Probably the 18% if the rate is a very important factor in your decision? Think again. Until you know if they are both calculated in the same way, it is hard to know which one is the cheapest.

The calculation below clearly shows you that a loan at 18% flat rate is actually more expensive that a reducing rate loan at 24 percent.

Many advertising messages quote low rates but do not specify the method of calculation and I urge customers to request clarification from the bank on the type of rate that is being advertised. Human nature naturally gets inclined towards lower rates but it is very important to check all the fine prints and compare like for like.

If you are looking for a full list of personal loans with all their fees and whether they are reducing or flat, you can find the comparison of all loans in the UAE at Souqalmal.com. You can also find a guide to interest rate calculation and conversion of reducing to flat on our blog.

Ambareen Musa is the founder and CEO of Souqalmal.com. Having moved to the Middle East in 2008, Ambareen worked as a consultant for Bain & Company – Middle East and focused on the financial services sector, before joining MasterCard Middle East and Africa to set up their consulting arm, before leaving 2 years later to become the founder of Souqalmal.com in 2011.