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Flat vs Reducing Rate Calculator (Flat to Reducing Converter)

This flat vs reducing rate calculator shows what a flat-rate loan quote really costs. A flat rate and a reducing-balance rate are not comparable, even when the percentage is identical; enter both quotes to see the EMI and total cost under each, and the reducing-balance rate the flat quote works out to.

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Calculator and results

A flat 10% on ₹5,00,000 over 5 years is the same as a reducing rate of 17.27%, so it costs ₹51,949 more than the 14% reducing quote (EMI ₹12,500 against ₹11,634).

₹
%

Interest charged on the full amount for the whole tenure.

%

Interest charged only on the outstanding balance.

Flat rate in reducing terms

17.27%

A flat 10% quote costs this much

Flat costs more

₹51,949

Difference in total repayment

Flat EMI

₹12,500

Reducing EMI

₹11,634

Side by side

Flat rate versus reducing balance on the same loan
StructureEMITotal interestTotal repayment
Flat 10%₹12,500₹2,50,000₹7,50,000
Reducing 14%₹11,634₹1,98,051₹6,98,051
A flat 10% over 5 years is the same cost as a reducing-balance loan at 17.27%. That is the number to compare against any reducing-rate quote, because on a flat rate you keep paying interest on money you have already repaid.

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Flat rate in reducing terms

17.27%

vs 14% quoted
Both columns exclude processing fees, insurance and documentation charges. A lender quoting the cheaper structure can recover the difference in fees, so compare the total you actually pay, not just the interest.
What it is:
A comparison of a flat-rate quote against a reducing-balance quote.
What it calculates:
The EMI and total cost under both structures, and the reducing-balance rate a flat quote really equals.

Key Assumptions

  • Flat interest is charged on the original principal for the whole tenure.
  • The equivalent reducing rate is solved so that both structures produce the same EMI.
  • Fees and charges are excluded from both sides.

How does the Flat vs Reducing Rate Calculator work?

On a flat rate, interest is charged on the original principal for every month of the tenure, whether you have repaid 10% of it or 90%. On a reducing balance, interest is charged only on what is still outstanding, which falls with every instalment.

The practical effect is large. Over a multi-year tenure, a flat rate costs close to double the same number quoted on a reducing balance, because you keep paying interest on money you have already returned.

To make the two comparable, this calculator solves for the reducing-balance rate that would produce the same EMI as the flat quote. That equivalent rate is the figure to set against any bank's advertised rate.

A flat quote converts to roughly 1.7 to 1.8 times its face value in reducing-balance terms across normal retail tenures. The multiple peaks around the two-year mark and eases slightly on longer loans, so the common belief that a flat rate gets worse as a rate the longer you borrow is not quite right. What does keep growing with tenure is the rupee cost: the extra you hand over rises with every extra month.

Neither total includes processing fees, insurance or documentation charges. Add those to both sides before deciding, because a lender quoting the cheaper structure can claw the difference back in fees.

Worked example: a ₹1,00,000 two-wheeler loan at 10% flat for 3 years charges ₹30,000 of interest (10% of ₹1 lakh for each of 3 years), so the EMI is ₹3,611. A reducing-balance loan with that EMI has a rate of 17.92%. A bank quoting 12% on a reducing balance is far cheaper, even though 12 looks bigger than 10.

Compare any flat quote with bank rates using the equivalent figure. See the lowest published rates on the bike loan and personal loan rate pages, and work out reducing-balance EMIs with the EMI Calculator.

Flat rate converted to the equivalent reducing rate

Flat rate1 year2 years3 years5 years
6%10.90%11.13%11.08%10.85%
8%14.45%14.68%14.55%14.13%
10%17.97%18.16%17.92%17.27%
12%21.46%21.57%21.20%20.31%

The reducing-balance rate that gives the same monthly EMI as the flat quote, before processing fees and other charges.

Flat vs Reducing Rate Calculator formula

Flat: total interest = P x R x T / 100, EMI = (P + interest) / n; Reducing: EMI = P x r x (1+r)^n / ((1+r)^n - 1)

P
= loan amount
R
= annual flat rate in percent
T
= tenure in years
r
= monthly reducing-balance rate
n
= tenure in months

The equivalent reducing rate is found numerically: the rate whose reducing-balance EMI matches the flat EMI exactly.

Flat vs Reducing Rate Calculator: worked example

A ₹5,00,000 loan over 5 years: 10% flat against 14% reducing

Flat EMI
₹12,500
Flat total interest
₹2,50,000
Flat 10% equals a reducing rate of
17.27%
Reducing EMI at 14%
₹11,634
Reducing total interest
₹1,98,051
The flat quote costs more by
₹51,949

Flat vs Reducing Rate Calculator: frequently asked questions

Why does a flat rate cost so much more?
Because the interest never shrinks. On a reducing balance, once you have repaid half the principal you are charged interest on half. On a flat rate you are charged on the full amount for the entire tenure.
Where will I run into flat rates?
Two-wheeler loans, some consumer durable finance, a number of gold loan schemes and parts of the unorganised lending market. Banks quote reducing-balance rates on retail loans.
Is a flat rate ever the better deal?
Yes, when the quoted flat number is low enough. A flat 5% over five years is cheaper than a reducing 12%. Compare the equivalent reducing rate, not the headline.
Does a flat rate get worse the longer the tenure?
In rupees, yes: the longer you borrow, the more you pay for money you have already returned. As a rate, no. A flat quote works out to roughly 1.7 to 1.8 times its face value in reducing-balance terms at any normal tenure, peaking around two years. So shortening the tenure saves you money, but it does not make a flat rate a fair rate.
How do I convert a flat rate in my head?
Nearly double it. A flat 10% is about 18% on a reducing balance, a flat 6% is about 11%. The rule of thumb holds across the tenures retail lenders actually offer, which is precisely why flat rates are quoted at all - 6% reads as cheap in a way that 11% does not.
How do I ask a lender which one they are quoting?
Ask directly whether interest is calculated on a reducing balance or a flat basis, and ask for the amortisation schedule. On a flat-rate loan, the interest portion of every instalment is identical.
What is 10% flat rate in reducing rate?
About 18% a year on a reducing balance: 17.97% over 1 year, 18.16% over 2 years, 17.92% over 3 years and 17.27% over 5 years. Compare that figure, not the 10%, with bank loan rates.

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Reviewed by Pradipta Ray, MBA (Finance) · Updated