Flat vs Reducing Rate
About the Flat vs Reducing Rate
Two loans can quote the same interest rate yet cost very different amounts, depending on whether the rate is "flat" or "reducing balance". This calculator shows the gap so you can compare loans honestly.
A flat rate charges interest on the full original amount for the whole tenure; a reducing-balance rate charges interest only on the outstanding balance, which falls as you repay. Enter the loan details to see both EMIs side by side.
Frequently asked questions
What is the difference between flat and reducing interest rates?
A flat rate charges interest on the entire original principal for the whole tenure, regardless of how much you have repaid. A reducing-balance rate charges interest only on the outstanding balance, so the interest shrinks as you pay down the loan.
Why does a flat rate cost more than it looks?
Because you keep paying interest on money you have already repaid. A 10% flat rate is roughly equivalent to a 17–19% reducing-balance rate over a typical tenure — so a "low" flat rate can be deceptively expensive.
How do I compare a flat rate to a reducing rate?
Compare the EMIs and total interest directly, as this calculator does, rather than the headline numbers. Never compare a flat-rate figure against a reducing-rate figure — they are not the same thing.
Which loans use flat rates?
Flat rates are common in some car, two-wheeler, consumer-durable and personal loans. Home loans almost always use reducing balance. Always ask which basis a quoted rate uses.
Is reducing balance always better for the borrower?
For the same quoted rate, yes — it costs less interest. The catch is that lenders set different rates for each method, so compare the actual EMI and total cost, not just the headline rate.