Financial Calculators
Flat vs Reducing Interest Rate Calculator
A 10% flat rate is not 10%. It is closer to 18%.
Equivalent reducing-balance rate
17.92%
1.79x the quoted 10% flat rate
- Monthly instalment
- ₹18,056
- Total interest
- ₹1,50,000
A flat rate charges interest on the full original amount for the whole tenure, even as you repay it. The reducing rate is what that actually costs on the balance you owe, and it is what a bank home loan quotes. Compare offers only after converting both to reducing rates.
These figures are for illustrative purposes only and are not investment advice. Please consult your investment adviser for investment related advice.
The oldest trick in retail lending
A flat rate charges interest on the full original loan for the entire tenure, as though you never repaid any of it. But you repay it every month, so the amount you actually owe falls steadily and the true rate on what you owe is far higher than the number quoted. Car dealers, consumer durable financiers and some personal loans quote flat rates precisely because the figure looks small.
The calculator finds the reducing-balance rate that produces the same instalment, which is the number to compare against any bank loan.
Find the reducing rate that gives the same EMI
Total interest = P x flat rate x years\nEMI = (P + interest) / months\nSolve for i such that P x i x (1+i)^n / ((1+i)^n - 1) = EMI; reducing rate = 12 x iWorked example: a Rs 5,00,000 loan at 10% flat for 3 years carries Rs 1,50,000 of interest and an instalment of Rs 18,056. The reducing-balance rate that produces that instalment is 17.92%, about 1.79 times the quoted flat rate.
Frequently asked questions
Is there a quick rule of thumb?
Reducing rate is roughly 1.8 times the flat rate for a three-year loan, and nearer 1.9 for five years. The multiple rises with tenure because the gap between what you owe and what you are charged on grows.
Do banks quote flat rates?
Rarely for home and car loans, where reducing rates are the norm. Dealer finance, gold loans, consumer EMIs and some NBFC personal loans still quote flat. Always ask which one it is.
Why does the ratio change with tenure?
On a one-year loan you owe most of the principal for most of the year, so the flat and reducing rates are close. On a five-year loan you owe half the principal on average, so the same interest is a far higher rate on what is outstanding.
Is a zero-cost EMI a flat-rate loan in disguise?
Often. The interest is built into the price or a processing fee, and a discount you would otherwise get is withheld. Work back from the instalment and the cash price to find the real rate.
Compare loans on one honest rate.
We help clients read loan offers, convert every rate to reducing, and pick the cheapest.