In loan terminology, what does a flat rate mean?

Study for the Specialist Automotive Finance Test. Use flashcards and multiple-choice questions with detailed explanations to get exam ready!

In a flat-rate loan, interest is charged on the full amount of the loan for the entire term. This means the total interest is calculated as loan amount times the flat rate times the term, regardless of how much principal you’ve repaid. As a result, the interest portion of each payment is based on the original loan, not on the remaining balance, which can make the overall cost higher than a loan that charges interest on the declining balance. The other descriptions describe charging interest on the outstanding balance, interest only on repayments, or rates that change over time, which don’t match the flat-rate approach.