Flat vs reducing rate converter

Flat rate and reducing rate, in plain words

A reducing-balance rate charges interest only on what you still owe. As you repay, the interest part of each EMI shrinks. Banks quote home, car and personal loans this way.

A flat rate charges interest on the full loan amount for the whole term, even after you have repaid most of it. The total interest is simply loan × flat rate × years, spread evenly over the EMIs. Because you keep paying interest on money you have already returned, a flat rate costs much more than the same number on a reducing balance.

Where flat rates still appear

You will meet flat rates mostly with car and two-wheeler dealer finance, consumer durable loans for phones, TVs and fridges, some NBFC personal loans and microfinance. The number sounds low ("just 7% flat"), which is why it is used in showrooms.

Murugan's car loan

Murugan runs a provision store in Villupuram. The car dealer offers him ₹8 lakh at a flat 7% for 5 years; his bank offers a reducing 9.5%.

The dealer's "7%" is really about 12.5% a year. The bank's 9.5% sounds higher, but it saves Murugan about ₹72,000 over the loan. Before he signed, he turned on Fees to add the dealer's documentation charges, which raised the real cost further.

How the conversion works

The tool finds the EMI first. For a flat rate: EMI = (loan + loan × flat rate × years) ÷ months. It then finds the reducing rate that gives the same EMI on the same loan, which is the real yearly rate. For terms of 1 to 5 years, a flat rate usually works out to about 1.7 to 1.9 times the reducing rate it equals; the exact multiple is shown live in the answer.

How to use this tool

1. Pick what you have: a flat rate, a reducing rate, or just my EMI.
2. Type the loan amount and the term in years and months.
3. Read the real yearly rate in the answer, and the EMI and total interest under it.
4. Turn on Fees to add the processing fee and see the APR, and Compare a bank offer to put a bank's reducing rate beside it.

The chart shows the interest you pay each year: under a reducing balance it falls year after year, while the flat method spreads the same total evenly, which is exactly why the flat number hides the real cost.

Starting from your EMI

Sometimes a shop or lender gives you only the EMI. Pick My EMI, type the loan, the EMI and the months, and the tool finds the real rate. For example, an EMI of ₹18,056 on ₹5 lakh for 3 years is a real rate of about 17.9% a year, the same as a flat 10%.

Fees and the APR

Since 1 October 2024 the Reserve Bank of India (RBI) asks banks and NBFCs to give every retail borrower a Key Facts Statement (circular RBI/2024-25/18, 15 April 2024). It must show the APR: the all-in yearly cost including the processing fee and other charges. Turn on Fees to see an APR worked out the same way: it is the rate at which the money you actually receive equals the EMIs you pay.

What to ask the lender

1. "Is this a flat rate or a reducing-balance rate?"
2. "What is the APR in the Key Facts Statement?"
3. "What is the processing fee, and is there a charge for closing early?"
4. "Can you quote me the EMI and the total amount payable?"

Common mistakes

• Comparing a flat number with a reducing number. Always convert first.
• Looking only at the EMI. A longer term lowers the EMI but raises the total interest.
• Ignoring fees. A low rate with a high fee can cost more than a slightly higher rate with none.
• Signing at the showroom. A bank or NBFC pre-approval often beats dealer finance; compare both here.

Rates and charges differ by lender; check the Key Facts Statement before you sign. This is a guide, not advice.