Flat vs Reducing Rate Calculator
A flat interest rate charges interest on the whole original amount for the entire tenure, ignoring every rupee you have already repaid. It is standard on gold loans, used car loans and most personal loans from NBFCs. This calculator converts a flat rate quote into the reducing balance rate it really is.
Where it goes
- The amount you actually borrowed₹1.00 lakh
- Interest−₹30,000
Worth knowing
A "10% flat" loan — what is the real rate?
17.92%. A flat rate charges interest on the whole original amount for the entire tenure, ignoring every rupee you have already repaid. By the end you owe almost nothing but are still paying interest as though you owed all of it.
Why do lenders quote flat rates at all?
Because the number is roughly half the real one. It is standard on gold loans, used-car loans and most personal loans from NBFCs and app-based lenders. A bank quoting a reducing rate is quoting the honest one.
How do I compare two offers?
Only ever compare reducing-balance rates, or compare total interest in rupees. A flat rate and a reducing rate are not the same unit, and putting them side by side is how people end up paying nearly double.
Payment schedule
| Year | Paid | Interest | Principal | Still owed |
|---|---|---|---|---|
| 1 | ₹43,333 | ₹15,723 | ₹27,610 | ₹72,390 |
| 2 | ₹43,333 | ₹10,349 | ₹32,985 | ₹39,405 |
| 3 | ₹43,333 | ₹3,928 | ₹39,405 | ₹0 |
Understanding this calculator
A flat rate and a reducing-balance rate are not two ways of quoting a similar cost. They are different arithmetic, and the difference is close to a factor of two.
What flat actually means
A reducing-balance loan charges interest on what you still owe. Repay half the loan and you pay interest on half.
A flat-rate loan charges interest on the ORIGINAL amount for the entire tenure, regardless of how much you have already repaid. In the final month, when you owe almost nothing, you are still paying interest calculated on the full original sum.
Roughly double
What a flat rate costs relative to the same number quoted as reducing balance
The exact multiple depends on tenure — it rises as the loan gets longer, because more of the term is spent paying interest on money already repaid.
So a 10% flat rate is not slightly worse than a 10% reducing rate. It is close to a 19% reducing rate, and on longer tenures the gap widens further. The calculator above converts the quote in front of you into the comparable figure.
Where you will meet it
Flat rates are standard on gold loans, used-car loans, most personal loans from smaller lenders, and a great deal of consumer-durable finance. They are not used on home loans, which is why anyone whose only borrowing experience is a mortgage tends to assume all quoted rates are comparable.
Where the money actually goes
Take a ₹5 lakh loan at 10% flat over five years. Interest is 10% of ₹5 lakh, every year, for all five years — ₹2.5 lakh in total, fixed at the outset. Your EMI is simply ₹7.5 lakh divided by 60 months.
Now consider what you owe in the final year. You have repaid most of the principal, so the balance is small — and you are still being charged ₹50,000 of interest, calculated on the full ₹5 lakh you borrowed five years ago. A reducing-balance loan at the same quoted rate would charge you almost nothing at that point.
That is the whole mechanism. The interest is decided on day one and never recalculated, so every rupee you repay early buys you nothing.
How to spot one without asking
- **The total interest is a round fraction of the loan.** ₹2.5 lakh on ₹5 lakh over five years at 10% is exactly half — flat-rate arithmetic produces tidy numbers that reducing-balance arithmetic never does.
- **Prepaying does not reduce the interest.** Ask what happens to the total if you repay early. On a flat loan the answer is usually "nothing", or a rebate calculated by a formula rather than by the balance.
- **The rate looks too good.** A personal loan quoted well below what banks charge on a reducing basis is almost always flat.
- **There is no amortisation schedule.** A reducing-balance loan can produce one month by month. A flat loan has nothing to schedule, because the split never changes.
When flat is not the wrong answer
On a very short tenure the two conventions converge, because there is little time for the balance to fall. A three-month advance at a flat rate costs only slightly more than the same reducing-balance quote.
And sometimes flat is the only form available — gold loans and much small-ticket consumer finance are quoted this way as a matter of course. The point is never that you should refuse such a loan. It is that you should convert it before comparing it with anything else, which is what this calculator is for.
Flat-rate lending is not illegal or hidden. It is a legitimate convention, and for very short tenures the difference is modest. What it is not is comparable to a reducing-balance quote, and comparing the two numbers directly is the mistake it reliably produces.
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Tax rules applied as of 2026-Q2, last verified against official sources on 2026-08-23. This calculator does arithmetic on the figures you enter — it is not investment advice, not a recommendation, and not a forecast. All calculators