Flat Rate vs Reducing Rate Interest: The Real Cost Explained

Two ways of charging interest

Reducing balance: each month interest is calculated on the outstanding principal, so interest falls as you repay. Banks and most home, car and personal loans quote this rate.

Flat rate: interest is calculated on the original loan for the full tenure, as if you never repaid anything. It is common in some consumer-durable and small-ticket loans.

An example

Loan of ₹5,00,000 for 3 years at 12%:

• Flat 12%: interest = 5,00,000 × 12% × 3 = ₹1,80,000. EMI = ₹18,889.
• Reducing 12%: EMI = ₹16,607 and total interest = about ₹97,900.

The flat-rate loan costs about ₹82,000 more. Its equivalent reducing-balance rate is about 21%, not 12%.

How to compare offers fairly

1. Ask whether the quoted rate is flat or reducing.
2. Convert flat to reducing with the flat vs reducing rate calculator.
3. Compare the total amount payable, including processing fees.
4. Use the EMI calculator to check the EMI.

This simple check can save you from a loan that looks cheap but is not. See also when a balance transfer saves money.

This article is for general information only and is not financial, legal or tax advice. Interest rates, fees and rules change, so confirm current terms with the lender or the regulator before you decide. Examples use illustrative figures. Last reviewed: October 2026.