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Why is the Interest rate (flat interest rate) different from the Effective Interest Rate?

The interest rate is used as reference to calculate the total interest payable on the loan on straight line basis, by assuming the loan principal is the same throughout the loan tenure.

Effective Interest Rate reflects the true cost of borrowing by taking into account the reducing principal balance over the loan tenure and any upfront processing fee charged. 

Hence, Effective Interest Rate is generally higher than flat interest rate. 

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