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Flat vs Reducing Interest Rate Calculator
A flat rate charges interest on the full loan for the whole term, even as you repay it, so it looks cheaper than it is. A 10% flat rate over 3 years is really about 17.92% on a reducing balance. Enter the quote you were given to see the real rate.
Flat rate converted to reducing rate
The reducing-balance rate that gives the same EMI as each flat rate.
| Flat rate | 1 yr | 2 yrs | 3 yrs | 5 yrs | 7 yrs |
|---|---|---|---|---|---|
| 6% flat | 10.90% | 11.13% | 11.08% | 10.85% | 10.58% |
| 7% flat | 12.68% | 12.91% | 12.83% | 12.50% | 12.16% |
| 8% flat | 14.45% | 14.68% | 14.55% | 14.13% | 13.69% |
| 9% flat | 16.22% | 16.43% | 16.24% | 15.71% | 15.19% |
| 10% flat | 17.97% | 18.16% | 17.92% | 17.27% | 16.66% |
| 11% flat | 19.72% | 19.87% | 19.57% | 18.80% | 18.09% |
| 12% flat | 21.46% | 21.57% | 21.20% | 20.31% | 19.50% |
| 14% flat | 24.91% | 24.92% | 24.40% | 23.25% | 22.24% |
Flat vs reducing: a worked example
| ₹5 lakh, 3 years | 10% flat | 10% reducing |
|---|---|---|
| Monthly EMI | ₹18,056 | ₹16,134 |
| Total interest | ₹1,50,000 | ₹80,809 |
| Real (reducing) rate | 17.92% | 10.00% |
The flat quote costs ₹69,191 more in interest, even though both say "10%".
Frequently asked questions
Is 10% flat the same as 10% reducing?
No. On ₹5 lakh over 3 years, 10% flat costs ₹1,50,000 in interest, while 10% on a reducing balance costs ₹80,809. A 10% flat rate is really about 17.92% reducing.
How do I convert a flat rate to a reducing rate?
Find the reducing rate that gives the same EMI. For tenures of 1 to 5 years the reducing rate is roughly 1.7 to 1.9 times the flat rate. The calculator above works it out exactly.
Which is better, flat or reducing?
At the same headline number, a reducing rate is always cheaper, because interest is charged only on what you still owe. Always ask for the reducing-balance rate, or the APR, before you sign.
Where are flat rates used?
Mostly car, two-wheeler and consumer durable loans arranged through dealers, and some personal loans from finance companies. Banks quote home loans on a reducing balance.
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