Flat vs Reducing Interest Rate Calculator
Over three years, a flat rate of 8% costs the same as a reducing-balance rate of 14.55%. Convert any quote here before you compare it with a bank loan.
The same flat rate over other tenures
The reducing rate is found by trial (bisection) until its EMI matches the flat-rate EMI to a fraction of a paisa. Calculated in your browser.
Say a two-wheeler or car dealer offers ₹5 lakh over three years "at just 8%". If that 8% is a flat rate, the interest is fixed at the start: 5,00,000 × 8% × 3 = ₹1,20,000, and the EMI is (5,00,000 + 1,20,000) ÷ 36 = ₹17,222. A bank charging 8% on a reducing balance would ask for ₹15,668. Over the three years the flat-rate loan costs ₹55,945 more, and it is the same as paying 14.55% on a reducing balance.
Two ways of charging interest
With a flat rate, interest is worked out once, on the full amount, for the whole tenure. It does not matter that you repay part of the principal every month; you keep paying interest on the original sum.
With a reducing-balance rate, interest is charged each month only on what you still owe. As the balance falls, so does the interest, and more of each EMI goes to principal. This is how banks calculate home loans and most personal loans, and how this site's other EMI calculators work.
There is no tidy formula for R in terms of F, so the calculator tries rates, halving the gap each time (bisection), until the two EMIs agree. Going the other way is direct: work out the reducing-rate EMI, add up all the EMIs, take away the principal, and divide by the principal and the number of years.
Checking the answer month by month
Take the ₹5 lakh, 8% flat, three-year loan again. The flat method charges the same ₹3,333 of interest every month (₹1,20,000 ÷ 36), even in the last month when almost nothing is owed. At the equivalent reducing rate of 14.55% a year, or about 1.21% a month, the same ₹17,222 EMI splits very differently:
| Month | Interest | Principal | Balance left |
|---|---|---|---|
| 1 | ₹6,062 | ₹11,161 | ₹4,88,839 |
| 12 | ₹4,480 | ₹12,742 | ₹3,56,773 |
| 36 | ₹206 | ₹17,016 | ₹0 |
Seen this way, the flat-rate loan is charging 14.55% a year on whatever you still owe, from the first month to the last. Both views add up to the same ₹1,20,000 of interest; the flat label simply spreads it evenly so the rate looks smaller.
Flat rates and their real cost
Equivalent reducing rates for common flat quotes. The answer does not depend on the loan amount, only on the rate and the tenure.
| Flat rate | 1 year | 3 years | 5 years |
|---|---|---|---|
| 5% | 9.10% | 9.31% | 9.15% |
| 6% | 10.90% | 11.08% | 10.85% |
| 7% | 12.68% | 12.83% | 12.50% |
| 8% | 14.45% | 14.55% | 14.13% |
| 10% | 17.97% | 17.92% | 17.27% |
| 12% | 21.46% | 21.20% | 20.31% |
The gap is widest around two to three years and narrows slowly for longer loans. That is why "double the flat rate" is only a rough check: over three years, a 5% flat rate is a little under twice as expensive, and a 12% flat rate is about 1.77 times.
Turning a bank's reducing rate into a flat figure
Sometimes you need the reverse, for example when a dealer quotes flat and your bank quotes reducing, and you would rather compare in the dealer's terms:
| Reducing rate | Flat equivalent, 3 years | Flat equivalent, 5 years |
|---|---|---|
| 9% | 4.83% | 4.91% |
| 10% | 5.39% | 5.50% |
| 12% | 6.52% | 6.69% |
| 14% | 7.68% | 7.92% |
So a 5% flat offer over five years is slightly dearer than a 9% reducing bank loan, which works out to 4.91% flat.
Where flat rates still appear
You are unlikely to see one from a bank for a home loan. They do still come up in dealer-arranged vehicle finance, some consumer durable schemes, and loans from informal lenders. Small-ticket "no-cost EMI" offers are a different trick: the interest may be zero, but a processing fee is added. A ₹999 fee plus GST on a ₹30,000 purchase repaid over six months works out to an APR of about 13.89%.
The quickest test of any offer is the EMI. For the same amount and tenure, the loan with the lower EMI is the cheaper one, whatever the rate is called. Regulated banks and NBFCs must also give you a Key Facts Statement with the annual percentage rate (APR), which is always on a reducing basis and includes fees. Our guide to APR explains it, and the loan comparison calculator works it out for two or three offers at once.
Frequently asked questions
Is a flat rate ever cheaper than a reducing rate?
Only if the flat rate is low enough. Compare like with like: convert the flat rate here, then compare the reducing rate you get with the other offer. At the same headline number, a flat rate always costs more, because you pay interest on money you have already repaid.
Can I just double the flat rate to get the reducing rate?
It is a rough guide only. For the tenures most loans use, the reducing rate comes out at about 1.7 to 1.9 times the flat rate. An 8% flat rate is 14.45% reducing over one year but 14.13% over five. Use the calculator for the exact figure.
Do banks in India use flat rates?
Home loans and most bank personal loans use reducing-balance rates. Flat rates still turn up in some dealer-arranged vehicle finance, consumer durable loans and informal lending. Whatever the quote, regulated lenders must show the annual percentage rate (APR) in the Key Facts Statement, which settles the question.
Does prepaying help on a flat-rate loan?
It can help less than you expect. The saving depends on how the lender works out the payoff amount on a flat-rate loan, and that is not always a simple reducing-balance figure. Ask for the foreclosure amount in writing before you prepay, and check any foreclosure charge in your loan papers.