Flat vs Reducing Rate Calculator
Deceptive Rate Warning:
A flat rate of **6%** sounds cheap, but because interest is charged on the original loan amount for the entire tenure (even as you pay down the debt), you are actually paying an equivalent reducing rate of 10.85% p.a.
- Total interest charges: ₹1,50,000.
- Total repayment: ₹6,50,000.
What to do next
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Reducing Equivalent Interest Rate Formula
Converts a deceptive flat interest rate into its reducing balance equivalent to expose the actual rate banks charge.
Worked Example: A loan with a 6% flat rate for 5 years (60 months)
Flat vs Reducing Balance: Exposing the hidden cost of simple rates
Sunita was offered a loan at a 6% flat interest rate. Another bank offered a 10.5% reducing balance rate. Sunita assumed the 6% flat rate was much cheaper. Her advisor suggested converting the flat rate to its reducing equivalent.
She discovered that a 6% flat rate over 5 years is equivalent to a 10.87% reducing interest rate. In a flat rate loan, interest is calculated on the full original principal throughout the tenure, even as you pay it down. The 10.5% reducing rate was actually cheaper.
Flat rates apply interest to the original principal throughout the loan, whereas reducing rates charge interest only on the outstanding balance, which decreases monthly.
Always convert a bank's flat rate offer into its reducing balance equivalent before signing. Never assume flat rates are cheaper than reducing rates.
Frequently Asked Questions
What is a flat interest rate?
A flat rate calculates interest on the full original principal throughout the loan term, ignoring the fact that your outstanding principal is decreasing with every EMI payment.
What is a reducing interest rate?
A reducing rate calculates interest monthly on the remaining outstanding principal. As you pay off the principal, the monthly interest portion decreases.
Why is flat rate misleading?
A flat rate looks deceptively cheap (e.g. 6% flat) but is actually equivalent to a much higher reducing rate (e.g. 10.87% reducing) because interest is charged on principal you've already repaid.
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