Personal Loan Interest Rates: Flat Rate vs Effective Rate

Flat rate vs effective rate

Bank Negara Malaysia (BNM) defines a flat rate as a rate that stays the same for the whole tenure, with interest calculated on the original loan amount disbursed at the start. This means the interest does not fall even though your outstanding balance gets smaller every month.

For fixed-rate or floating-rate loans, interest is calculated on the reducing balance, that is, on the principal still outstanding. The effective rate shows the real cost of the loan based on that balance.

So a flat rate and an effective rate with the same number do not cost the same: over the same tenure, a flat rate usually means a higher real cost than the advertised figure suggests. For Islamic products, the term used is profit rate.

Total cost of repayment

The real total cost of a loan is the sum of all monthly instalments over the tenure, plus any fees and charges. For a flat-rate loan the calculation is simple:

• Total interest = loan amount × annual rate × tenure (years)
• Monthly instalment = (loan amount + total interest) ÷ number of months

BNM requires banks to tell you the effective rate and the total repayment amount before you sign, including in advertisements and promotional materials whenever an interest rate is mentioned.

Conditions and what to check

Before accepting an offer, check the information banks must disclose under BNM's requirements:

• Whether the rate is fixed, floating or a combination, and for floating rates, the circumstances in which the rate may rise and the impact
• How interest is calculated, on a daily or monthly rest basis
• The loan tenure and whether collateral is required
• All fees and charges, when they are payable and what affects them
• Any insurance or takaful required as a condition of the loan

BNM has also issued its Policy Document on Personal Financing, which prohibits banks from offering personal financing where interest is computed using a flat rate and/or the Rule of 78 method. These provisions take effect on 1 January 2027.

Approval and the final rate offered to you depend on the bank's assessment of your financial profile.

How to compare offers

• Compare the effective rate, not just the advertised rate
• Compare the total repayment amount for the same loan amount and tenure
• Ask each bank for its Product Disclosure Sheet (PDS). BNM requires a PDS so that consumers can compare products and make informed decisions
• Check the fees, charges and promotion conditions, and whether the rate is fixed or floating

Our Promotion Rate page shows promotion rates advertised by several banks, with a monthly-instalment estimate calculator. All calculations are estimates only; confirm the effective rate and total repayment in the bank's PDS.

Sources

1. Bank Negara Malaysia — Policy Document on Personal Financing (BNM/RH/PD 028-130). Issued 30 September 2025. Definitions of flat rate and fixed rate; paragraphs 10.11–10.13 (prohibition of flat rate and Rule of 78, disclosure of the effective rate), effective 1 January 2027
2. Bank Negara Malaysia — Policy Document on Product Transparency and Disclosure (BNM/RH/PD 028-136). Issued 2 December 2024. Schedule I paragraphs 1.1.1–1.1.7 (rate information, effective rate, total repayment, fees and charges) and paragraph 16 (Product Disclosure Sheet)

Sources checked on: 25 October 2026.

This guide is general information only and is not financial advice. It does not list any bank's rates; actual terms are set by the bank. Approval is not guaranteed.

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