Flat vs Reducing Interest Calculator
A flat rate looks lower than it is. It charges interest on the full loan for the whole tenure, even though you are repaying the principal each month. Enter a flat rate to see the true reducing-balance rate it equals.
Results
Equivalent reducing-balance rate
14.55%
- EMI at the flat rate
- ₹17,222.22
- Total interest at the flat rate
- ₹1,20,000
- EMI at the same rate on a reducing balance
- ₹15,668.18
- Interest at the same rate on a reducing balance
- ₹64,055
- Extra cost of the flat rate
- ₹55,945
A flat rate of 8% is equivalent to about 14.55% on a reducing balance, and costs ₹55,945.42 more than the same rate on a reducing balance.
Total interest: flat vs reducing at the same quoted rate
- Reducing balance₹64,055 (53.4%)
- Extra cost of flat rate₹55,945 (46.6%)
Show the calculation steps
- Flat interest = P × rate × years = ₹5,00,000.00 × 8% × 3 = ₹1,20,000.00.
- Flat EMI = (P + interest) ÷ n = ₹17,222.22.
- The reducing-balance rate that gives the same EMI over 36 months is 14.548% a year (found numerically).
- For comparison, 8% on a reducing balance gives an EMI of ₹15,668.18 and interest of ₹64,054.58.
Why flat rates are misleading
With a flat rate the interest is calculated once on the original amount. But you repay part of the principal every month, so on average you owe only about half of it. The effective rate on the balance you actually owe is therefore nearly double the flat rate.
Comparing offers
Always compare loans on a reducing-balance basis or on APR. If one lender quotes a flat rate and another a reducing rate, convert the flat rate first, as this calculator does.
Formula
Flat interest = P × rate × years
Flat EMI = (P + flat interest) ÷ n
Equivalent reducing rate: the r that makes P × r × (1 + r)^n ÷ ((1 + r)^n − 1) equal the flat EMI
Where:
- P
- = Loan amount
- n
- = Number of monthly payments
- r
- = Monthly reducing-balance rate
Example calculation
₹5,00,000 at an 8% flat rate for 36 months
Inputs
- Loan Amount
- ₹5,00,000
- Flat Interest Rate
- 8 %
- Tenure
- 36 months
Result
- Equivalent reducing-balance rate
- 14.55%
- EMI at the flat rate
- ₹17,222.22
- Total interest at the flat rate
- ₹1,20,000
- EMI at the same rate on a reducing balance
- ₹15,668.18
- Interest at the same rate on a reducing balance
- ₹64,055
- Extra cost of the flat rate
- ₹55,945
Step-by-step
- Flat interest = P × rate × years = ₹5,00,000.00 × 8% × 3 = ₹1,20,000.00.
- Flat EMI = (P + interest) ÷ n = ₹17,222.22.
- The reducing-balance rate that gives the same EMI over 36 months is 14.548% a year (found numerically).
- For comparison, 8% on a reducing balance gives an EMI of ₹15,668.18 and interest of ₹64,054.58.
Important notes
- The equivalent rate is found numerically and shown as a nominal annual rate (monthly rate × 12).
Disclaimer: This calculator provides estimates for informational purposes and should not be considered financial advice. Actual figures from lenders, banks and investment products can differ because of fees, taxes, rounding rules and changing rates. Consult a qualified professional before making financial decisions.
Frequently asked questions
How do I convert a flat rate to a reducing rate?
Compute the flat EMI, then find the monthly rate at which the standard EMI formula gives that same EMI. This calculator does the search for you.
Why is the reducing rate almost double the flat rate?
Because the flat rate charges interest on the full amount even as you repay it. The average balance owed is about half of the loan.
Which is better, a flat or a reducing rate?
For the same quoted percentage, a reducing rate always costs less.
Related calculators
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