Flat vs Reducing Rate Calculator
Compare a flat interest rate against the reducing balance method and see how much extra a flat rate really costs.
A flat rate of 10% works out to roughly — on a reducing balance basis (about 1.8× the flat rate).
How flat and reducing rates are calculated
A flat rate charges interest on the full original principal for the entire tenure, so the interest amount never changes even as you repay. A reducing balance rate charges interest only on the outstanding principal, which falls every month. This is why a flat rate that looks low is far more expensive than the same number quoted on a reducing basis.
Why a flat rate looks cheaper but costs more
A 10% flat rate sounds cheaper than a 17% reducing rate — but they cost almost the same. Lenders quote flat rates precisely because the small number is more appealing.
With a flat rate, you keep paying interest on the full ₹5L even in the final month when you may owe only ₹20,000. Reducing balance charges only on what is left.
For typical tenures, a flat rate is roughly equivalent to 1.8 times that rate on a reducing basis. So 8% flat ≈ 14.4% reducing. Always ask for the reducing equivalent before signing.
Frequently asked questions
What is the difference between flat rate and reducing rate?
A flat rate charges interest on the original loan amount for the whole tenure, so your interest never reduces as you repay. A reducing balance rate charges interest only on the outstanding balance, which falls every month. For the same quoted percentage, a flat rate costs significantly more.
How do I convert a flat rate to a reducing rate?
There is no exact one-line formula, but a quick rule of thumb is that the reducing equivalent is roughly 1.8 times the flat rate for common tenures (1–5 years). For example, a 10% flat rate is approximately equivalent to an 18% reducing balance rate. This calculator computes the precise reducing equivalent for your inputs.
Why do lenders quote flat rates?
Because a flat rate produces a smaller-looking number for the same actual cost. A loan that effectively costs 17% on a reducing basis can be advertised as a 9.5% flat rate, which feels much cheaper to borrowers. Vehicle loans, consumer durable loans and some personal loans are commonly quoted this way.
Which method should I prefer as a borrower?
Always prefer the reducing balance method, and compare loans using the reducing rate or the total interest paid — never the flat rate alone. If a lender only quotes a flat rate, ask for the reducing equivalent or the total amount payable so you can compare like with like.
Does prepayment help with a flat rate loan?
Prepayment helps far less with a true flat rate loan, because interest is fixed on the original principal and is often front-loaded or non-refundable. With a reducing balance loan, every prepayment immediately lowers the outstanding balance and the interest charged going forward, so prepaying is much more beneficial.