Flat rate

Flat rate can refer either to a pricing structure or to an interest rate.

Pricing Structure
A flat rate is a pricing structure where charges are gathered on a regular basis, instead of varying according to usage. Services that levy flat rates include cable and satellite television, and some land line telephone companies.

Interest Rate

In finance, the term flat rate refers specifically to flat interest rates. Loans with flat interest rates are calculated based on the original principal and then paid out for the whole term of the loan.

For example, a borrower that takes out a loan of $1000 for a flat interest rate of 1% per month for 10 months will be paying $110 a month. The borrower ends up paying a total of $1100 or a total of 10% in interest.

As can be seen above, the calculation of a flat interest rate loans is easy to understand. Because of that, flat rate loans are very popular, despite being disadvantageous compared to other loan structures, such as those with diminishing rates. For loans with diminishing rates the amount paid off is deducted from the remaining loan amount before the interest is computed for the next payment, resulting in less money paid for interest. Another disadvantage of flat rate loans is that borrowers are usually not allowed to pay the whole loan amount in advance even if they find the means to do so.

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