Understanding Flat or Nominal interest or Profit rate (for Islamic Financing Products)
Flat or Nominal interest or profit rate (for Islamic financing products) is defined as a stated interest or profit rate. This interest or profit works according to the simple interest or profit calculation and does not take into account the compounding periods.
Effective interest or profit rate is the one which caters to the compounding periods during a payment plan. It is used to compare the annual interest/profit between funding with different compounding periods like week, month, year etc.
In general, the stated or nominal interest or profit rate is less than the effective one. And the latter depicts the true picture of financial payments.