Car-loan ads promising "2.5%" or "3%" look far cheaper than a 6% mortgage — but the two numbers are calculated differently and can't be compared directly. Here's the difference, based on the Bank of Thailand (BOT) and the Office of the Consumer Protection Board (OCPB), and how to compare offers properly.
In short
- Flat rate charges interest on the whole amount borrowed for the whole term; it's typical for car hire-purchase.
- Reducing balance (effective rate) charges interest on what you still owe each period; almost all other loans, such as mortgages, use it.
- 3% flat over 2–5 years equals roughly 5.6–5.7% a year on a reducing balance.
- Personal-use vehicle hire-purchase has caps on the effective rate: 10% (new car), 15% (used car), 23% (motorcycle) a year.
How a flat rate works
The BOT says flat-rate interest is usually used for car and motorcycle hire-purchase. It takes two steps:
- Total interest = amount × yearly rate × years
- Instalment = (amount + total interest) ÷ number of instalments
The BOT's example: a 100,000-baht motorcycle at 3% a year over 2 years (24 instalments).
- Total interest = 100,000 × 3% × 2 = 6,000 baht
- Instalment = (100,000 + 6,000) ÷ 24 = 4,416.67 baht
The key point: interest is charged on the full 100,000 baht for both years, even near the end when you owe very little.
How a reducing balance works
The BOT explains that reducing-balance interest is charged on the principal still outstanding each period. Part of every payment is interest and the rest reduces the principal, so next period's interest is smaller.
For equal instalments the BOT gives: instalment = loan ÷ [(1 − 1/(1+i)ⁿ) ÷ i], where i is the rate per period (the yearly rate ÷ 12) and n the number of instalments.
The BOT's example: 12,000 baht at 24% a year over 6 instalments gives 2,142.31 baht. In practice the lender rounds it to 2,150 baht with a smaller last payment of 2,093 baht, because interest is charged by the actual days in each month.
Why 3% flat isn't as cheap as it looks
Because a flat rate charges interest on the full amount all along, the reducing-balance rate that gives the same instalment is almost twice as high.
The BOT's rough conversion is flat rate × 1.8 — 3% flat ≈ 5.4%. The exact figure depends on the term; the table below was worked out precisely with our loan payment calculator.
| Offer | Instalment | Total interest | Effective rate per year |
|---|---|---|---|
| 100,000 baht, 3% flat, 24 months | 4,416.67 | 6,000.00 | about 5.66% |
| 480,000 baht, 3% flat, 60 months | 9,200.00 | 72,000.00 | about 5.64% |
| 480,000 baht, 3% flat, 48 months | 11,200.00 | 57,600.00 | about 5.67% |
The 480,000-baht examples come from the BOT's car hire-purchase page, which points out that paying over 48 instead of 60 months saves 14,400 baht in interest, even though each instalment is higher.
Comparing two offers correctly
The BOT's example: dealer A charges 4% flat, dealer B 6% on a reducing balance. A looks cheaper, but converted it's about 4% × 1.8 = 7.2% — more expensive than B.
The right way is to convert every offer to an effective rate per year first, or compare the total interest over the whole contract.
Caps on car hire-purchase interest
The OCPB's Contract Committee announcement of B.E. 2565 (2022) makes car and motorcycle hire-purchase a controlled-contract business. It covers contracts made from 10 January 2023, for individuals using the vehicle privately.
- Effective-rate caps per year: new cars 10%, used cars 15%, motorcycles 23%.
- Discount for paying off early (on the interest not yet due):
- paid up to one third of the instalments: at least 60%;
- from one third up to two thirds: at least 70%;
- more than two thirds: all of it.
- Late-payment penalty: at most 5% a year, on the overdue amount only.
A common misunderstanding: the OCPB explains that the announcement did not turn car loans into reducing-balance loans. Interest is still charged at a flat rate; the effective rate is used to set the caps. The BOT's hire-purchase page adds that the OCPB requires the reducing-balance rate to be stated in the contract.
BOT notification 55/2568 (2 December 2025) sets the same caps for hire-purchase lenders under BOT supervision.
Other caps worth knowing
According to the BOT, for lending under its supervision the effective rate may not exceed:
- 25% a year for supervised personal loans (24% when a vehicle registration is the collateral);
- 16% a year for credit cards.
Work out your own instalment
Use the loan payment calculator with the amount financed, the rate and the number of months.
- Choose Flat rate for a car-loan offer — the "effective rate per year" line gives the figure to compare with the caps or with other offers.
- Choose Reducing balance for a mortgage or personal loan.
To see how much money you didn't put down could grow if you saved it instead, try the compound interest calculator.
Note
This article is based on documents from the Bank of Thailand and the Office of the Consumer Protection Board, read on 28 September 2026. The effective rates in the table were computed with our loan calculator. This is general information, not financial or legal advice — read the contract and ask the lender before deciding.
