How to use the converter
- Choose the direction. Flat to reducing turns a flat-rate quote into its reducing equivalent; reducing to flat does the opposite.
- Enter the rate and the term in months. The equivalent rate and the instalment per AED 10,000 update as you type.
Personal loans run for up to 48 months and car loans for up to 60, so the quick buttons cover terms from 12 to 60 months. You can type any term.
How the conversion works
The exact method
The converter finds the reducing rate that gives exactly the same monthly instalment as the flat rate over the same term. With a loan P, a flat rate f and n months:
Flat instalment = P × (1 + f × n ÷ 12) ÷ n
Reducing instalment = P × i ÷ (1 − (1 + i)−n)
There is no formula that gives i directly, so the converter solves for it numerically: it keeps halving the range of possible monthly rates until the two instalments match to far better than 0.01 percentage points. The annual reducing rate shown is 12 × i. Going the other way is direct: f = (n × instalment ÷ P − 1) × 12 ÷ n.
The quick approximation
A common rule of thumb is flat rate × 2n ÷ (n + 1). It is easy to do in your head, but it overstates the exact rate: for 5% flat over 48 months it gives 9.80% against 9.24% exact. The converter shows it only for comparison; the headline figure is always the exact one.
Worked example: 5% flat over 48 months
Worked example
5% flat over 48 months
The rate and the term are illustrations, not market rates.
- Flat instalment per AED 10,000: (10,000 + 10,000 × 5% × 4) ÷ 48 = AED 250.00.
- The reducing rate that also gives AED 250.00 a month over 48 months is 9.24%.
- The rule of thumb gives 9.80%, about 0.55 points too high.
5% flat over 48 months is 9.24% reducing.
The equivalent rate depends on the term, but not by much. For the same 5% flat rate:
| Term | Exact reducing rate | Rule of thumb |
|---|---|---|
| 12 months | 9.10% | 9.23% |
| 24 months | 9.32% | 9.60% |
| 36 months | 9.31% | 9.73% |
| 48 months | 9.24% | 9.80% |
| 60 months | 9.15% | 9.84% |
Why the APR can be higher again
The converted rate covers interest only. Lenders must also disclose the annual percentage rate (APR), which adds the other fees to the interest or profit and compounds them over a year, so a loan with fees has an APR above its converted reducing rate. Both figures belong in the Key Facts Statement the lender gives you before you sign. To see the whole instalment and total cost, use the loan payment calculator.
The same maths applies to profit rates quoted on a flat basis in Islamic finance; see Islamic profit rates for how those products are structured. Related reading: car loan rates, used car loans and personal loans without salary transfer.
The UAE disclosure rule
You should not have to do this conversion yourself: the Central Bank requires the effective rate next to any advertised flat rate. The converter lets you check it.
Flat rates come with the effective rate
Effective rate shown
Any bank advertising a flat interest rate must show the equivalent effective (reducing-balance) rate next to it.
- Applies to
- Banks and finance companies licensed by the CBUAE (conventional and Islamic), lending to individuals
- Source
- CBUAE Regulation No. 29/2011 Regarding Bank Loans & Other Services Offered to Individual Customers, Article (6) Interest, Central Bank of the UAE
- Checked
More on the difference in flat vs reducing rates explained.