Interest Rate
Also called: rate of interest
What is Interest Rate?
An interest rate is the cost of borrowing, expressed as a percentage of the amount owed per period. It may be quoted as flat or reducing, annual or monthly, fixed or floating — and those distinctions change the real cost substantially.
Why Interest Rate matters
Two loans quoting the same number can cost very different amounts. A 12% flat rate is roughly a 21% reducing rate, which is the single most common misunderstanding in small business lending.
How Interest Rate works in practice
Always convert quotes to the same basis before comparing, and include processing fees and insurance in the effective cost. Ask for the total amount repayable — it is the least ambiguous question there is.
Frequently asked questions
Flat charges interest on the original amount throughout; reducing charges it on the outstanding balance, which falls each month.