Flat vs Reducing Rate Calculator
Compare loan interest rates and identify the cheaper option
Compare loan interest rates and identify the cheaper option
Difference in Total Interest:
| Parameter | Flat Rate | Reducing Rate |
|---|---|---|
| Monthly EMI | ₹ 3,611 | ₹ 3,227 |
| Total Interest | ₹ 30,000 | ₹ 16,162 |
| Total Payment | ₹ 1,30,000 | ₹ 1,16,162 |
When shopping for a loan—whether it's a personal loan, car loan, or home loan—you will come across two main methods of interest calculation: Flat Interest Rate and Reducing Balance Rate (also known as Diminishing Balance Rate). At first glance, a Flat Rate might look lower and more attractive, but it is often much more expensive than a Reducing Rate.
In the Flat Interest Rate method, the interest is calculated on the full principal amount throughout the entire loan tenure. It does not matter how much principal you have already repaid; you continue to pay interest on the original loan amount.
Formula: Interest = (Principal × Rate × Years) / 100
This method is commonly used for car loans and personal loans offered by dealerships or non-banking financial companies (NBFCs) to make the interest rate appear deceptively low.
In the Reducing Balance method, the interest is calculated only on the outstanding principal balance. As you pay your EMIs, a portion goes towards principal repayment. The next month's interest is calculated on the reduced principal. This is the standard method used by banks for home loans and most fair lending practices.
Formula: Calculated monthly based on outstanding balance.
Consider this example: You take a loan of ₹1 Lakh for 3 years.
In Option A (Flat), you pay interest on ₹1 Lakh for all 3 years. Total Interest = ₹30,000.
In Option B (Reducing), you pay interest on ₹1 Lakh in the first month, but as the balance reduces, interest reduces. Total Interest ≈ ₹16,162.
Conclusion: A 10% Flat Rate is actually equivalent to an effective Reducing Rate of approx 17-18%! The calculator above helps you uncover this hidden cost.
Use this tool whenever you are offered a loan with a "Flat" interest rate quote. It will help you convert that flat rate into an equivalent reducing balance EMI so you can compare it fairly with bank offers. It is essential for negotiating better terms on car loans and consumer durable loans.
Disclaimer: This calculator is designed to illustrate the difference between interest calculation methods. Actual loan offers may include processing fees, advance EMIs, or other charges that affect the final cost. Please read loan documents carefully before signing.
