4 ms·

I've never even heard of a "flat rate" loan until now. For the average american it sounds very close to a fixed rate which we are more used to even though it i

I've never even heard of a "flat rate" loan until now. For the average american it sounds very close to a fixed rate which we are more used to even though it is far different.

pionar 13y ago
Generally, in the US, where you see a flat rate is in the loan details, where it's usually, if you take the entire term to repay the loan, the overall interest paid is $X.
- cpwright 13y ago
  As Wikipedia describes it that is not a flat rate loan. If I borrow $100,000 for 15 years at 5% it would cost me $183,389; and I expect to see that in the disclosure. But that is still a regular APR. A flat rate 5%, would mean that each year I pay 5% in interest on the $100,000; even though I've already paid off some of the principal. So I would end up paying $200,000 in total.
aestra 13y ago
Not at all. A fixed rate loan is one where the interest can't change in response to events. So if I borrow money for 30 years with a fixed rate loan at 5%, I will pay 5% the entirety of the loan even if inflation rises to 10% or I am late with a few payments. You can always refinance though, but that creates a different loan. A variable rate loan is one where interest can change. Credit cards are usually variable, so if I miss a payment your interest rate can go up or if you've been a customer for a long time and have a good history of paying on time your interest rate can go down. Mortgages with variable rates usually fix the rate for x years and then they reevaluate in x years. During the housing bubble, variable rate mortgages with were common.
- cpwright 13y ago
  I understand a fixed loan and a variable loan, and those are what I'm used to considering when deciding whether to borrow money. I think the issue that the post brings up is that the target market for the microcredit borrowers consists of people used to flat rate loans, which is totally alien to the target market for lenders. I think the lenders will likely mentally map "flat rate" to the closest thing they are aware of, which is likely "fixed rate."

I've never even heard of a "flat rate" loan until now. For the average american it sounds very close to a fixed rate which we are more used to even though it is far different.

pionar 13y ago

Generally, in the US, where you see a flat rate is in the loan details, where it's usually, if you take the entire term to repay the loan, the overall interest paid is $X.

cpwright 13y ago
As Wikipedia describes it that is not a flat rate loan. If I borrow $100,000 for 15 years at 5% it would cost me $183,389; and I expect to see that in the disclosure. But that is still a regular APR. A flat rate 5%, would mean that each year I pay 5% in interest on the $100,000; even though I've already paid off some of the principal. So I would end up paying $200,000 in total.

aestra 13y ago

Not at all. A fixed rate loan is one where the interest can't change in response to events. So if I borrow money for 30 years with a fixed rate loan at 5%, I will pay 5% the entirety of the loan even if inflation rises to 10% or I am late with a few payments. You can always refinance though, but that creates a different loan. A variable rate loan is one where interest can change. Credit cards are usually variable, so if I miss a payment your interest rate can go up or if you've been a customer for a long time and have a good history of paying on time your interest rate can go down. Mortgages with variable rates usually fix the rate for x years and then they reevaluate in x years. During the housing bubble, variable rate mortgages with were common.

cpwright 13y ago
I understand a fixed loan and a variable loan, and those are what I'm used to considering when deciding whether to borrow money. I think the issue that the post brings up is that the target market for the microcredit borrowers consists of people used to flat rate loans, which is totally alien to the target market for lenders. I think the lenders will likely mentally map "flat rate" to the closest thing they are aware of, which is likely "fixed rate."