Flat interest is one of the terms in a loan that you should understand before deciding to apply for a loan or credit.
What is flat interest, how is it different from effective interest, and how is it calculated? Read more in this one BFI Finance article!
1. Definition of Flat Flowers
Flat interest is an interest rate calculation system whose amount refers to the initial debt principal. This calculation system is commonly used in short-term loans, such as unsecured loans (KTA) and motor vehicle ownership loans.
In a flat interest system, the portion and principal in monthly installments will remain the same. Flat interest has the advantage of being easier and simpler to calculate.
You can generally find flat interest anywhere, especially at non-bank financial institutions such as finance companies.
1.1 Factors Affecting Flat Interest
Some of the factors that affect flat interest are as follows.
1. Loan amount
2. Long loan
3. Loan risk level
4. Market competition
2. The Difference Between Flat Interest and Effective Interest
One of the different flower schemes that is often compared to flat flowers is the effective flower. In fact, both interest rates are the same. The difference between flat interest and effective interest lies in what percentage of interest is multiplied.
Effective interest calculates the interest percentage with the remainder of the installment amount, instead of the original loan size. Effective interest is also usually used for long-term loans, such as public housing loans (KPR) or investment loans.
Below are the advantages and disadvantages of each type of flower that exist:
|Type of Interest||Advantages||Disadvantages|
1. Easy and simple calculation.
2. The number of installments is fixed/the same every month.
3. Suitable for short-term loans.
1. The total payment is greater.
2. Does not take into account the remaining principal debt.
3. Unprofitable if paid off quickly.
1. The total payment is smaller.
2. Calculate the remaining principal debt.
3. It is profitable if it is paid off quickly.
1. Calculations are more complicated and complex.
2. The number of installments at the beginning is very large.
3. Calculation of Flat Interest
How do you calculate flat interest? The flat interest calculation formula is as follows:
Installments = (Loan Principal + (Loan Principal x Interest Rate x Loan Length)) / Loan Length
To make it easier for you to understand the formula above, here is an example of calculating flat interest based on a multipurpose loan with a tenor of 12 months.
For example, you borrow Rp. 120 million from a finance company with an interest rate of 12% per year or 1% per month. So, the monthly installments that you have to pay are:
Installments = (IDR 120 million + (IDR 120 million x 1% x 12 months)) / 12 months
Installments = (IDR 120 million + IDR 14.4 million) / 12 months
Installments = IDR 134.4 million / 12 months
Installments = IDR 11.2 million per month
That is the total number of installments you have to pay per month for 12 months. If you want to know the amount of interest and principal contained in the installment, you can use the following formula:
Interest = Loan Principal x Interest Rate
Principal = Installment - Interest
Thus, the amount of interest and principal in monthly installments is:
Interest = IDR 120 million x 1%
Interest = IDR 1.2 million
Principal = IDR 11.2 million - IDR 1.2 million
Principal = IDR 10 million
So, every month you are required to pay interest of IDR 1.2 million and a principal of IDR 10 million.
4. Tips for Paying Off Debt Properly and Correctly
After knowing what flat interest is and how to calculate it, of course, you want to pay off existing debts immediately so you are not burdened with large interest.
However, paying off debt is not easy, especially if the amount is quite large. Therefore, we will provide some tips on paying off debt properly and correctly that you can use as a reference.
Image Source: Pexels/Rdne Stock Project
4.1. Reset Expense Post
The first step you can take is to reset the expense item. Take a look at what expenses you can reduce or even eliminate.
For example, you can reduce the cost of eating out, subscribing to streaming, or shopping for non-essential items. That way, you can save more and allocate existing funds to pay off debt.
4.2. Recapitulation of Debt
The second step is to make a recap of the debts you have. Write down in detail how much you owe, to whom you owe it, what the interest rate is, how long the tenor is, and what the monthly installments are.
That way, you can find out your current financial condition more clearly and plan the right debt settlement strategy.
4.3. Use Savings
The third money tip is to use savings to pay off some or all of the debt. If you have large enough savings, you can use them to pay off existing debts in stages or all at once. Thus, you can save on interest costs that must be paid every month.
4.4. Credit Take Over
The next tip is to take over credit or replace old loans with new loans that have lower interest rates.
For example, if you have a loan with a flat rate of 12% per year, you can look for another loan with an effective interest rate of 10% per year. That way, you can reduce the existing monthly installment burden.
4.5. Selling Owned Assets
This fifth tip does sound quite extreme, but it can really help to pay off accumulated debts by selling the assets you have.
The assets in question can be land, houses, motorized vehicles, gold, stocks, or other valuables. If you have assets that are not very important or rarely used, you can also sell them for extra cash.
4.6. Paying Off Debt with the Greatest Interest
Sixth, you can pay off debt with the highest interest first. If you have several debts with different interest rates, you should focus on paying off the debt with the highest interest first. So, you can save on interest costs that must be paid in the future.
4.7. Preloved Unused Items
The seventh tip is to sell items that are no longer used or needed. You can take advantage of online platforms such as Tokopedia, Bukalapak, or Shopee to sell preloved items.
4.8. Avoid Bad Habits Dig Holes Close Holes
Eighth, try to avoid the bad habit of digging holes and closing holes. That is, never borrow money to pay off other debts. This will only make your debt bigger and more difficult to pay off. It's best if you look for other ways to cover your debts without having to owe again.
4.9. Get Professional Help
The ninth step is to ask for professional help if you find it difficult to manage finances and pay off existing debts. You can consult a financial consultant, financial planner, or creditor in question. They can provide advice and solutions according to your current financial condition.
4.10. Find Additional Income
Looking for additional income is the right solution to help you pay off current debts while increasing your income.
You can use your skills or hobbies to earn extra money. For example, you can choose to become a freelancer, online teacher, content creator, or reseller. That way, you can have more money to pay off your debts.
4.11. Starting a Business with Thin Capital
The eleventh step is to start a business with thin capital that can provide big profits. You can choose the type of business that suits your interests and abilities and has good prospects in the future. For example, you can run a culinary, fashion, or digital business. That way, you can have a stable source of income and have the potential to increase.
BFI friends, that's the discussion regarding flat interest. Hopefully, this article can help you easily understand what flat flowers are. Be sure to consider many things carefully so that the loan you take doesn't interfere with your monthly cash flow.