Aqid ERPTwo ways a rate is quoted
A bank loan usually charges its rate on what is still owed: each instalment pays that month's interest and the rest reduces the debt, so the interest falls month by month. That is a reducing balance.
Much finance in the Gulf — murabaha, car and personal finance — is quoted as a flat rate: the rate applies to the full amount for every year of the term, and the total is fixed at the start. The same number on a flat basis costs far more, because the customer pays the rate on money already repaid.
A worked example
SAR 100,000 over five years (60 months) at 6%.
| Reducing balance: monthly instalment | 1,933.28 |
|---|---|
| Reducing balance: total interest | 15,996.80 |
| Flat rate: 100,000 × 6% × 5 years | 30,000.00 |
| Flat rate: (100,000 + 30,000) ÷ 60 | 2,166.67 a month |
| The reducing rate with the same instalment | about 10.85% |
What the figure leaves out
Administration fees, insurance and the VAT charged on fees all add to the cost. Saudi finance companies must state the annual percentage rate (APR), which includes them: compare offers by APR, not by the quoted rate.