Key Takeaway
Flat-rate interest charges interest on the original loan amount throughout the tenure. A 12% flat rate equals approximately 21–22% reducing balance rate. Always ask your lender for the reducing balance rate equivalent.
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.
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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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