Flat vs Reducing Interest Rate Calculator
Compare the true cost of a flat rate loan versus a reducing balance loan. Find the equivalent reducing rate for any flat rate loan.
Loan Details
In a Flat Rate loan, interest is calculated on the original principal throughout. In a Reducing Balance loan, interest is charged only on the outstanding principal, making it genuinely cheaper.
Enter loan details to compare flat vs reducing rates
About Flat vs Reducing Interest Rate
When lenders quote interest rates, they often use the flat rate method which appears lower but actually costs you more. Understanding the difference is crucial before taking any loan.
Flat Rate Method
EMI = (Principal + Total Interest) / Tenure in Months
Interest is calculated on the original principal for the entire tenure. Even as you repay, interest keeps being charged on the full original amount.
Reducing Balance Method
EMI = [P × R × (1+R)^N] / [(1+R)^N − 1]
Interest is charged only on the outstanding principal after each EMI payment. As you repay, your interest burden reduces — this is the fairer method.
Rule of Thumb
- A flat rate of 10% is roughly equivalent to a reducing rate of 17–18%.
- Always ask lenders for the reducing balance rate equivalent.
- Home loans and car loans in India typically use the reducing balance method.
- Some personal and consumer loans may quote flat rates — be cautious.