Flat vs Reducing Rate Calculator
Compare a flat-rate loan with a reducing-rate loan and see the reducing rate a flat rate really works out to.
Flat rate works out to
reducing rate, the way most bank loans are quoted.
Flat rate
Reducing rate
The reducing-rate loan costs less in interest.
How it works
Flat rate f on loan P for n months (t = n ÷ 12 years):
Interest = P × f × t · EMI = (P + Interest) ÷ n
Reducing rate r (monthly rate i = r ÷ 12):
EMI = P × i × (1 + i)n ÷ ((1 + i)n − 1)
The equivalent reducing rate is the r at which the reducing-rate EMI equals the flat-rate EMI. There is no simple formula for it, so the calculator finds it by narrowing down the rate step by step until the two EMIs match.
Worked example
₹1,00,000 for 12 months at 10% flat, compared with 10% reducing.
- Flat interest = ₹1,00,000 × 10% × 1 = ₹10,000
- Flat EMI = (₹1,00,000 + ₹10,000) ÷ 12 = ₹9,166.67
- Reducing EMI at 10% = ₹8,791.59; total interest ₹5,499.06
- The reducing rate that gives an EMI of ₹9,166.67 is about 17.97%
Frequently asked questions
What is the difference between a flat rate and a reducing rate?
With a flat rate, interest is worked out on the full loan amount for the whole tenure, even though you repay part of it every month. With a reducing rate, interest is charged only on the amount you still owe, so it falls as you repay. The same number sounds similar but costs very different amounts.
Why does a 10% flat rate cost more than a 10% reducing rate?
Because a flat rate keeps charging interest on money you have already paid back. On ₹1,00,000 over 12 months, 10% flat costs ₹10,000 in interest, while 10% reducing costs ₹5,499.
What is the "equivalent reducing rate"?
It is the reducing rate that would give exactly the same EMI as the flat-rate loan. It shows what the flat rate really costs in the terms banks use for most loans, so you can compare it fairly with a reducing-rate offer.
Where are flat rates used?
Flat rates are sometimes quoted for personal loans, vehicle loans and consumer finance. Always ask the lender which method they use, and look at the Annual Percentage Rate (APR) in the Key Facts Statement, which shows the all-in yearly cost.
How is the flat-rate EMI calculated?
Total interest = loan amount × flat rate × years. The EMI is the loan amount plus that interest, divided by the number of months.
Does this include processing fees?
No. Fees and charges add to the cost of both kinds of loan. The APR in the Key Facts Statement includes them and is the best single number to compare offers.
Can the equivalent rate be lower than the flat rate?
Only at 0%. For any positive flat rate, the equivalent reducing rate is higher, roughly close to double for short loans, because interest is charged on the full amount throughout.
About these results
- Method and timing
- Flat: interest on the full amount for the whole tenure, EMI = (amount + interest) ÷ months. Reducing: interest monthly at the yearly rate ÷ 12 on what is still owed. The equivalent reducing rate is found by bisection.
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This comparison is for information only and is not financial advice. Both rates are your inputs; check the method, fees and APR in the lender's Key Facts Statement before you borrow.