Flat Interest Calculation
The flat interest method calculates interest on the loan amount (principal) for the term of the loan account. The interest and principal components of all repayments is the same for the life of the loan account.
The calculations are:
Interest = P * r/100 * n
Interest Installment = Interest / # number of Repayments
Principal Installment = P / # number of Repayments
Payments = Interest Installment + Principal Installment
Where,
P = loan amount (principal)
r = rate of interest per period (e.g., per year, per month)
n = term of the loan
Example
A client borrows $1000 (P) with a interest rate of 2% (r) per month for four (n) months with four monthly payments.
Interest: $1000 * 2/100 * 4 = $80
Interest installment: $80 / 4 = $20
Principal installment: $1000 / 4 = $250
Monthly installment (principal and interest): $20 + $250 = $270
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