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Blog · November 7, 2026

What does 10% flat interest on a payment plan really cost a year?

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You are buying a $1,200 sofa. The shop offers a payment plan: 10% flat interest, over 12 months. Ten percent sounds like a normal rate. It is not, and the sums show why.

A 1,200 dollar purchase with 12 payments of 110 dollars costs 120 dollars in interest at 10 percent flat, but only about 66 dollars at a genuine 10 percent yearly rate. Same $1,200 purchase, 12 monthly payments of $110Interest on the sticker: 10% flat$120Interest on a genuine 10% loan$66The flat 10% really costs 18.0% a year.Total paid: $1,320 flat, versus about $1,266 at a true 10%.
On $1,200 over 12 payments of $110, a 10% flat rate costs $120 in interest. A genuine 10% yearly loan would cost about $66.

Step 1: what the shop charges

“Flat” means the interest is worked out on the original amount, for the whole time, once:

So far, honest enough. Every figure on the paperwork adds up.

Step 2: what a genuine 10% loan would cost

On a normal loan, interest is charged on what you still owe, which shrinks each month as you pay. A 10% yearly rate is about 0.8333% a month (10 ÷ 12). Spread $1,200 over 12 months at that rate and the monthly payment comes to about $105.50.

Same sofa, same 12 months, but $54 less (120 − 66, rounded). The flat plan costs roughly double the interest.

Step 3: why the flat rate hides this

Look at the balance you really owe, month by month, if each payment is $110:

With payments of 110 dollars the true amount owed falls from 1,200 to 920, 627, 320 and then zero at months 0, 3, 6, 9 and 12, while a flat rate charges as if all 1,200 were owed all year. What you still owe as you pay (true balance)$1,200month 0$920month 3$627month 6$320month 9$0month 12A flat rate charges interest as if you still owed $1,200 all year.Balances use the 18.0% yearly rate; rounded to whole dollars.
With $110 payments, the true balance falls from $1,200 to about $920, $627 and $320 and reaches zero at month 12.

By month 6 you have paid off roughly half of the sofa and owe about $627, yet the flat rate is still charging as if you owed $1,200. Your average debt over the year is far below $1,200, because you are repaying all the time. The flat method ignores that. You are paying 10% on money you have already given back.

Step 4: the true yearly rate

To compare fairly, ask: what yearly rate makes a loan of $1,200 cost exactly $110 a month for 12 months? Solving that gives about 18.0% a year, found by trying rates until the payment matches (a spreadsheet or the calculator below does this in a second). Check: at 18.0%, month 1 interest is about 1,200 × 0.18 ÷ 12 = $18, and the balance runs down to zero at month 12, as in the picture.

So “10% flat” is really a loan at about 18.0%. The printed number understates the true rate by almost half.

The more months the plan lasts, the bigger the gap, since a flat rate keeps charging on the original amount while the real balance keeps falling.

What to do

  1. Ask for the yearly rate. Many places must state an APR (annual percentage rate) for credit. Use it, not the flat figure, to compare offers.
  2. Check the totals. Total repaid ÷ amount borrowed shows what you are really paying: 1,320 ÷ 1,200 = 1.10 here, so $120 for the privilege.
  3. Compare like with like. A “10% flat” plan and a “14% APR” loan are not the same kind of number. The 14% APR loan may well be cheaper (for 12 months it would cost about $93), and you would only know by converting.
  4. Look for extras. Fees, insurance add-ons and early-repayment charges can raise the cost further.

Note that this is not saying the plan is a bad choice. If it lets you buy something you need and you understand the cost, that is your call. The point is to know it is about $120 for the loan and about 18.0% a year, not “10%”.

Try it with your own numbers

The free Flat Rate to APR calculator translates a loan’s flat interest rate into its true yearly rate (APR). It is listed with Money Didn’t Have to Be This Hard, a plain-English reading book whose page says it explains what a “flat” rate hides. Enter the amount, the flat rate and the term from your own offer to get the true yearly rate.

Cover of Money Didn't Have to Be This Hard
Money Didn’t Have to Be This HardSee the chapters, free calculators and printable sheets.

Rule of thumb

This is arithmetic for planning, not financial advice. Check the exact terms, fees and rate on any offer you are considering.

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