Flat vs Reducing Rate Calculator
The true interest rate behind a flat-rate loan
True amortisation of the flat-rate loan
| Year | Principal repaid | Interest paid | Balance |
|---|---|---|---|
| 1 | ₹71,427 | ₹73,573 | ₹4,28,573 |
| 2 | ₹83,496 | ₹61,504 | ₹3,45,078 |
| 3 | ₹97,604 | ₹47,396 | ₹2,47,473 |
| 4 | ₹1,14,097 | ₹30,903 | ₹1,33,376 |
| 5 | ₹1,33,376 | ₹11,624 | ₹0 |
Each flat-rate EMI split at the effective 15.71% reducing rate — how the loan actually amortises.
Understand the result
About the Flat vs Reducing Rate Calculator
Flat rate vs reducing rate: what is the difference?
A reducing-balance rate charges interest only on the amount you still owe, so the interest falls as you repay. A flat rate charges interest on the original loan amount for the entire tenure, even though you are repaying it every month. The same headline number therefore costs far more as a flat rate — typically close to double.
This flat vs reducing rate calculator converts any flat rate into its true reducing-balance equivalent, shows the EMI and total interest at both, and the extra you would pay on a flat-rate offer.
How this calculator works
A flat rate charges interest on the full loan amount for the entire tenure, even though you pay part of it back every month. By the last year you might owe only a fraction of the original sum, but you are still paying interest on all of it.
Banks quote home and most personal loans on a reducing balance: interest is charged only on what you still owe. The two rates are not comparable — a flat rate always looks much cheaper than it is.
The calculator finds the reducing-balance rate that produces exactly the same EMI. That effective rate is the loan’s true cost, and it is the number to compare against any bank offer.
Formula
Flat interest = P × flat rate × years Flat EMI = (P + flat interest) ÷ months Effective rate = r such that P × r(1 + r)ⁿ ÷ [(1 + r)ⁿ − 1] = flat EMI (solved numerically; r is monthly, × 12 for the annual rate)
Worked example
- A ₹5,00,000 loan at a 9% flat rate for 5 years.
- Flat interest = 5,00,000 × 9% × 5 = ₹2,25,000; EMI = ₹7,25,000 ÷ 60 = ₹12,083.
- That EMI corresponds to about 15.7% on a reducing balance — 1.75 times the quoted rate.
Flat rate to effective rate
| Flat rate | 1 year | 2 years | 3 years | 5 years |
|---|---|---|---|---|
| 5% | 9.10% | 9.32% | 9.31% | 9.15% |
| 7% | 12.68% | 12.91% | 12.83% | 12.50% |
| 9% | 16.22% | 16.43% | 16.24% | 15.71% |
| 11% | 19.72% | 19.87% | 19.57% | 18.80% |
Across common tenures, a flat rate is equivalent to roughly 1.7 to 1.85 times the same number on a reducing balance.
Assumptions & important notes
What this calculator assumes
- Interest is fixed for the tenure and every EMI is paid on time.
- Processing fees, insurance and other charges are excluded; including them would push the effective rate higher still.
Important notes
- Rule of thumb: the effective rate is roughly 1.6–1.85 times the flat rate. The multiple is highest on short, low-rate loans and falls as the tenure and rate rise.
- The RBI requires lenders to disclose the annual percentage rate (APR) in the Key Fact Statement. Ask for it — it is the effective rate including fees.
- Prepaying a flat-rate loan saves far less than you expect, because the interest was fixed on the original amount from day one.
Frequently asked questions
Is a 9% flat rate better than a 14% reducing rate?
No. A 9% flat rate over 5 years is about 15.7% on a reducing balance, so the 14% reducing-rate loan is cheaper. Always convert before comparing.
Why do car dealers quote flat rates?
Because the number looks smaller. A flat rate is simple to calculate and easy to advertise, but it understates the true cost of borrowing.
How do I convert a flat rate to a reducing rate quickly?
Multiply by about 1.75 for a rough estimate (a little more for short loans, a little less for long ones). For the exact figure, enter the loan here — the calculator solves for the rate that gives the same EMI.
Are flat-rate loans allowed?
Yes, but since October 2024 every regulated lender must give a Key Fact Statement that shows the annual percentage rate (APR) on a reducing-balance basis, including fees. Use that figure to compare with other loans.
PaiseWise runs entirely in your browser — the figures you enter are never sent anywhere. Results are estimates for planning only, not financial, tax or investment advice.