Flat vs Reducing Rate Calculator

What is Flat Rate vs Reducing Rate?

When taking a loan, the interest rate can be calculated using two different methods: flat rate and reducing (or diminishing) balance rate. With a flat rate, the interest is calculated on the entire original loan amount throughout the tenure, regardless of how much principal you have already repaid. This means you pay interest on money you have already returned, making the effective cost of borrowing significantly higher. With a reducing balance rate, the interest is calculated only on the outstanding principal balance, which decreases with each EMI payment. As a result, the interest component of your EMI reduces over time while the principal component increases. A flat rate of 10% is roughly equivalent to a reducing rate of about 17-19% depending on the tenure, which is why loans advertised at flat rates can appear cheaper but are actually more expensive. Most banks and housing finance companies in India use the reducing balance method for home loans and personal loans, while some vehicle loans and consumer finance products may still use the flat rate method. Always compare loans on an effective or reducing rate basis to make an informed decision.