Flat vs Reducing Rate Calculator

In a flat rate loan, interest is charged on the full original principal for the entire tenure, regardless of how much you have repaid. In a reducing balance loan, interest is charged only on the outstanding principal, which falls every month as you repay. For the same headline rate, a reducing balance loan costs much less.

No. A 10% flat rate is roughly equivalent to an 18% reducing balance rate for a typical 5-year loan — almost double. This is because under flat rate you keep paying interest on money you have already repaid. Always convert a flat rate to its effective reducing rate before comparing offers.

There is no simple multiplier, but a rough rule is that the effective reducing rate is about 1.8 to 1.9 times the flat rate for medium tenures. The exact effective rate is the reducing rate that produces the same EMI as the flat loan — which the calculator above computes precisely for your amount and tenure.

Flat rates are common in some car loans, two-wheeler loans, gold loans, consumer-durable (EMI on appliances/phones) financing, and informal or local lending. Home loans, most personal loans, and credit cards use reducing balance. If a quoted rate looks unusually low, ask whether it is flat — it often is.

Because the number looks smaller and more attractive. A '7% flat' car loan sounds cheaper than a '12% reducing' one, but the flat loan is actually more expensive. Lenders use flat quoting as a marketing tactic. Converting to the effective reducing rate reveals the true cost.

Flat rate EMI = (Principal + Total Interest) ÷ Number of months, where Total Interest = Principal × Flat Rate × Years. For example, ₹8 lakh at 10% flat for 5 years has total interest of ₹4 lakh, total payable ₹12 lakh, and an EMI of ₹20,000 — far higher than the same rate on reducing balance.