Flat vs Reducing Rate Calculator
See what a flat interest rate really costs. Enter the loan amount, flat rate and tenure to find the equivalent reducing-balance rate and the extra interest you pay.
The flat rate quoted by the lender. Flat rates always look lower than the real cost of the loan.
EMI (Flat Method)
₹23,333
Total Interest (Flat)
₹4.00 L
Effective Reducing Rate
14.13%
What the flat rate really costs
A flat rate of 8.00% on this loan is actually equivalent to a reducing-balance rate of 14.13%. A true reducing-balance loan at 8.00% would charge only ₹2.17 L in interest, so the flat structure costs you ₹1.83 L extra.
Always ask whether a loan rate is flat or reducing. Banks and NBFCs must disclose the reducing-balance (effective) rate, but informal lenders and some dealers quote only the flat rate.
Flat rate vs reducing balance rate
Lenders quote loan interest in two very different ways. Flat rate (or "simple interest") charges the quoted rate on the full original principal for the entire tenure. Reducing balance charges it only on the outstanding amount, which falls every month as you repay. The same number - say "8% interest" - looks identical on paper, but the flat rate is actually almost double the reducing rate in real terms. This calculator shows the effective reducing-rate equivalent of any flat rate quote, so you can compare apples to apples.
How to use the Flat vs Reducing Rate Calculator
- Enter the loan amount. The principal you plan to borrow.
- Enter the flat rate quoted. The flat interest rate the lender is offering.
- Set the tenure. Loan tenure in years.
- Review the comparison. See total interest on the flat rate vs equivalent reducing rate.
- Read the effective rate. The true reducing-balance rate equivalent - often almost double the flat rate.
Formula and method
Flat rate ignores that you've been repaying principal. Reducing balance correctly charges interest only on what you still owe. A 12% flat rate can be roughly equivalent to a 22% reducing rate over 5 years.
When to watch for flat rate
- Personal loans. Some NBFCs quote flat. Always ask for the reducing equivalent.
- Consumer EMI offers. Phone, appliance, furniture loans often quote flat-rate "low EMI".
- Old-style car loans. Less common today but still seen at small lenders.
- Gold loans and unorganised credit. Often quoted flat to look attractive.
- The trap. A "6% flat" loan can be over 11% in reducing terms over 5 years.