Interest charged on the loan without taking into consideration that periodic payments reduce the amount loaned. For example, an individual takes a $10,000 loan at 10% payable in 5 equal installments,. Using a flat interest rate, the interest charge would be $5,000 for the entire term. However, it does not take into consideration that after the first payment, the debt would be reduced by the amount paid, thus effectively reducing the interest expense for the whole period.