What are the difference of loan interest between fixed rate and compound rate?

When bank offer you a loan by saying that the interest rate is fixed, is not compounded, should you be happy and excited?

Many of the people might think fixed rate is more benefit to us and it is not compounded, so the interest we pay should be less, but actually you are paying more with the fixed rate loan.

When bank offer you a fixed rate loan, the interest is actually charging on the lump sum of the amount. Lets say you are borrowing RM100,000 with 10% fixed rate interest, then actually you are paying total RM110,000 and divide into 12 months (RM 9,166.67 per month).

But if you are taking a compound rate with 10%. You only need to pay RM8,791.59 (total RM105,499.08), which means you are only paying 5.5% instead of 10%.

How can it be? Actually the magic behind this is, with taking the compound rate interest, the interest rate is charging on the amount that you not yet to pay, however with the fixed rate interest, they are charging you on the lump sum that you borrow. Below are 2 figures that show you how the fixed rate and compound rate work.

Figure 1: How the fixed rate works

Figure 2: how the compound rate work

So next time, when you see bank offer you any attractive rate, try to ask them, how they charge on the interest first.