Flat vs Reducing Rate Calculator

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 really works out to.

Loan amount

₹

Flat rate quoted (per year)

Interest charged on the full amount for the whole tenure.

Reducing rate quoted (per year)

Interest charged only on the outstanding balance.

Tenure

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
Structure	EMI	Total interest	Total 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.

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.

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 it works

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.

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.

Example calculation

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

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.