This article describes the Flat Interest Rate lending scheme amortization method and gives examples on of how to calculate payment schedules.
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General
The Flat Interest Rate lending scheme is a fixed payment lending scheme. This scheme has amortization method's prominent feature is that the installment payments are fixed. This method has both fixed monthly* Principal and fixed monthly Interest. Naturally, the Total monthly amount is fixed too (this is what is similar between the Flat Interest Rate and the Annuity (ENG)).
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* Monthly installments are the most common, but other installment periods are also possible. Examples: annually, semi-yearly, quarterly, semi-monthly, bi-weekly, weekly, etc. |
How to calculate fixed monthly payment
Fixed monthly payment is calculated according to the formula:
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When dividing the loan amount by the number of installments (Formula 1), a repeating decimal may occur. This leads to a loss of precision. For instance, in Example 2:
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where
PNP is the last scheduled principle principal amount,
A is the loan amount,
Pi is the amount of principal to be repaid in the i-th month (financial precision).
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