How to use the flat vs reducing rate calculator
- Choose whether the rate you were quoted is a flat rate or a reducing rate.
- Enter the loan amount, the rate and the tenure.
- Read the equivalent rate and compare the EMI and interest under both methods.
- Check the tenure table: the same flat rate means a different reducing rate for each tenure.
Flat rates as reducing rates
| Flat rate | 1 year | 3 years | 5 years |
|---|---|---|---|
| 6% flat | 10.90% | 11.08% | 10.85% |
| 8% flat | 14.45% | 14.55% | 14.13% |
| 10% flat | 17.97% | 17.92% | 17.27% |
| 12% flat | 21.46% | 21.20% | 20.31% |
| 15% flat | 26.62% | 25.98% | 24.68% |
Reducing rates as flat rates
| Reducing rate | 1 year | 3 years | 5 years |
|---|---|---|---|
| 9% reducing | 4.94% | 4.83% | 4.91% |
| 11% reducing | 6.06% | 5.95% | 6.09% |
| 14% reducing | 7.74% | 7.68% | 7.92% |
| 18% reducing | 10.02% | 10.05% | 10.47% |
| 24% reducing | 13.47% | 13.75% | 14.52% |
The formulas
Flat EMI = (P + P × f × t) ÷ n
Reducing EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1)
f is the flat yearly rate, t the tenure in years, n the number of months and r the monthly reducing rate. The equivalent rate is the r at which both EMIs match, found by trial and error. For a full EMI schedule, use the EMI calculator.
Frequently asked questions
What is the difference between a flat and a reducing interest rate?
A flat rate charges interest on the full loan amount for the whole tenure, even as you repay it. A reducing (reducing-balance) rate charges interest only on the amount still outstanding each month. Home loans and most bank loans use reducing balance; some car, two-wheeler, consumer durable and personal loans are quoted flat.
How do I convert a flat rate to a reducing rate?
Work out the flat EMI, (P + P × flat rate × years) ÷ months, then find the reducing rate that gives the same EMI. There is no simple formula, so it is solved numerically. A 10% flat rate over 3 years gives an EMI of ₹3,611 on ₹1 lakh, which equals a reducing rate of about 17.92%.
Is there a rule of thumb?
For typical loans of 1 to 5 years at flat rates of 6–15%, the reducing rate is about 1.6 to 1.9 times the flat rate. It is generally lower for higher rates and longer loans, so use the calculator for the exact figure.
How much more does a flat rate cost?
On ₹1 lakh over 3 years at 10%, the flat method costs ₹30,000 in interest against ₹16,162 on reducing balance, ₹13,838 more for the same quoted number.
Do lenders have to tell me the effective rate?
Yes. RBI requires banks and NBFCs to give a key facts statement for retail and MSME term loans that shows the annual percentage rate (APR), the all-in annual cost including fees. Compare loans on the APR rather than a flat rate or the EMI alone.