Flat vs reducing rate calculator
The same interest rate charged both ways, side by side, and the reducing rate a flat rate really equals.
A flat rate charges interest on the full loan for the whole tenure; a reducing rate charges it only on what you still owe. So the same number costs far more when it's flat: 12% flat on ₹2,00,000 for 3 years is ₹72,000 of interest, against ₹39,143 at 12% reducing. That 12% flat rate is really about 21.2% reducing.
- EMI
- ₹7,556
- Total interest
- ₹72,000
- Total you repay
- ₹2,72,000
- EMI
- ₹6,643
- Total interest
- ₹39,143
- Total you repay
- ₹2,39,143
At the same 12%, the flat-rate loan costs ₹32,857 more in interest.
A 12% flat rate over 3 yr costs the same as a 21.20% reducing rate. A 12% reducing rate is the same as 6.52% flat.
Interest only; processing fees, GST and insurance are extra. The cost that includes them is the APR on your Key Facts Statement. Figures are indicative; your lender's schedule may differ by a few rupees.
Flat rate to reducing rate: conversion table
The reducing-balance rate that costs the same as each flat rate, by tenure. Interest only, before fees.
| Flat rate | 1 year | 2 years | 3 years | 5 years |
|---|---|---|---|---|
| 8% flat | 14.45% | 14.68% | 14.55% | 14.13% |
| 10% flat | 17.97% | 18.16% | 17.92% | 17.27% |
| 12% flat | 21.46% | 21.57% | 21.20% | 20.31% |
| 14% flat | 24.91% | 24.92% | 24.40% | 23.25% |
| 16% flat | 28.33% | 28.22% | 27.53% | 26.10% |
| 18% flat | 31.72% | 31.46% | 30.59% | 28.88% |
| 20% flat | 35.07% | 34.65% | 33.60% | 31.58% |
| 24% flat | 41.70% | 40.88% | 39.43% | 36.82% |
Worked example: ₹2,00,000 at 12% for 3 years
| 12% flat | 12% reducing | |
|---|---|---|
| EMI | ₹7,556 | ₹6,643 |
| Total interest | ₹72,000 | ₹39,143 |
| Total you repay | ₹2,72,000 | ₹2,39,143 |
The flat loan charges 12% of the full ₹2,00,000 every year, even in the last months when you owe very little. The reducing loan charges 12% only on the balance, so its interest shrinks as you repay. The gap is ₹32,857.
Before you sign: compare the APR
- Ask which kind of rate it is. If the quote says "flat" or doesn't say, convert it with the table above before comparing it with a bank's reducing rate.
- Read the Key Facts Statement. RBI requires lenders to give you one before you sign any retail loan sanctioned since 1 October 2024. It shows the APR, which includes the processing fee and other charges, and the full repayment schedule.
- Compare APRs, not headline rates. A low rate with a high processing fee can cost more than a slightly higher rate with no fee.
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Questions people ask
What is a flat rate of interest?
A flat rate charges interest on the full loan amount for the whole tenure, even though you repay part of it every month. On ₹2 lakh at 12% flat for 3 years, the interest is ₹72,000: 12% of ₹2 lakh, three times over.
What is a reducing balance rate?
A reducing (or diminishing) balance rate charges interest each month only on the amount you still owe. As your EMIs pay the loan down, the interest falls. On ₹2 lakh at 12% reducing for 3 years, the interest is about ₹39,143.
How do I convert a flat rate to a reducing rate?
Find the reducing rate at which the same EMI repays the same loan over the same tenure. There is no simple formula, so the calculator above solves it. As a guide, a 12% flat rate over 3 years equals about 21.2% reducing, close to double. The exact figure depends on the tenure; the conversion table on this page shows it for common rates.
Which is better, flat rate or reducing rate?
At the same headline number, a reducing rate is always cheaper, because you stop paying interest on money you have already returned. A flat rate is not a trick in itself, but it looks lower than it is. Compare both loans on the same basis: the reducing rate, or better still the APR.
Do personal loans in India use flat or reducing rates?
Bank and NBFC personal loans are usually quoted on a reducing balance. Flat rates still show up on some vehicle loans, consumer-durable EMIs and smaller lenders. Whatever the quote, the Key Facts Statement that RBI requires before you sign shows the APR, which puts every loan on the same footing.
What is APR and how is it different?
The Annual Percentage Rate is the yearly cost of the loan including the interest and all other charges, such as the processing fee. RBI has required lenders to show it in a Key Facts Statement for retail loans sanctioned since 1 October 2024. APR is the number to compare across lenders; this calculator covers the interest part only.
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