Flat vs Reducing Rate Calculator
Don't be fooled by low "flat rate" offers. See the true cost difference.
Car loans, consumer loans often use flat rate
Home loans, bank loans use reducing balance
The Truth Revealed
Interest Comparison
| Metric | Flat (10%) | Reducing (14%) |
|---|---|---|
| Monthly EMI | $18,056 | $17,089 |
| Total Interest | $150,000 | $115,197 |
| Total Repayment | $650,000 | $615,197 |
| Verdict | Expensive | Better |
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Don't Fall for the "Flat Rate" Trap
A 10% flat rate sounds cheaper than an 18% reducing rate, right? Wrong! They cost almost the same. Our calculator reveals the truth behind flat rate offers.
Car dealers, consumer loan providers, and NBFCs often quote "flat rates" because they look attractive. But a flat rate is calculated on the original loan amount for the entire tenure, ignoring your monthly repayments.
Understanding the Difference
Flat Rate
Interest = Principal × Rate × Years. You pay interest on money you've already returned!
Reducing Balance
Interest calculated only on outstanding balance. Fair and standard method used by banks.
Quick Conversion Rule
Reducing Rate ≈ 1.8 to 2.0 × Flat Rate (varies by tenure)
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Frequently Asked Questions
What is the difference between flat rate and reducing rate?
Flat rate: Interest is calculated on the ORIGINAL loan amount for the entire tenure. Reducing rate: Interest is calculated on the OUTSTANDING balance, which decreases as you pay EMIs. Flat rate appears lower but is actually more expensive.
Why do dealers offer flat rate instead of reducing rate?
Because flat rate looks cheaper! A 10% flat rate sounds better than 18% reducing rate, even though they cost about the same. It's a marketing tactic to make loans appear more affordable.
How do I convert flat rate to reducing rate?
A common rule of thumb: Reducing rate ≈ 1.8 to 2.0 × Flat rate. For example, 10% flat ≈ 18-20% reducing. Our calculator gives you the precise conversion based on your specific loan terms.
Which is better: 8% flat or 14% reducing?
Calculate to be sure! An 8% flat rate equals approximately 15-16% reducing rate. So 14% reducing is actually CHEAPER than 8% flat. This is why comparing stated rates is misleading.
Why is flat rate more expensive?
In flat rate, you pay interest on the original amount even after you've paid back half the loan. In reducing, interest is only charged on what you still owe. By year 3 of a 5-year loan, you're paying interest on money you already returned!
Which loan types use flat rate?
Car loans from dealers, consumer durables loans, personal loans from NBFCs, some two-wheeler loans. Always ask if the rate is flat or reducing. Banks typically use reducing balance for home loans and education loans.
Can I prepay a flat rate loan?
Yes, but benefits are limited. In a flat rate loan, interest is pre-calculated upfront. Prepayment may save some interest but not as much as with reducing balance loans. Check for prepayment penalties.
Does loan tenure affect the flat vs reducing comparison?
Yes! Longer tenures make flat rates even more expensive relative to reducing rates. A 10% flat rate for 5 years equals ~19% reducing, but for 7 years it equals ~21% reducing.
How can I negotiate a better rate?
Always ask for the effective annual rate (EAR) or reducing rate equivalent. Armed with this knowledge, you can compare offers properly. Sometimes a bank loan at higher reducing rate is cheaper than dealer financing at low flat rate.
Is 0% flat rate actually free?
Rarely. 0% financing often means the interest is built into the price, or you forfeit cash discounts. Compare the financed price to the cash price minus available discounts. You might save more by paying cash or getting a bank loan.