Compare flat rate vs reducing balance interest
See why the same advertised rate costs very differently depending on whether it's flat or reducing-balance, and see the flat rate's real effective rate.
The same rate is compared under both interest methods.
Flat-rate loans usually have a noticeably higher EMI for the same quoted rate.
What the flat rate actually costs, expressed as a reducing-balance-equivalent rate.
Frequently asked
What's the difference between flat rate and reducing balance?
Flat rate charges interest on the original loan amount for the entire tenure, even as you pay it down. Reducing balance charges interest only on what's still outstanding, which shrinks every month. For the same quoted rate, flat rate always costs more.
Which one do most loans use?
Home, car, and personal loans from banks almost always use reducing balance. Flat rate shows up more often in some personal loans, consumer durable financing, and older-style chit/finance schemes. Always confirm which method a lender is quoting.
How is the equivalent rate calculated?
It's the reducing-balance rate that would produce the same EMI as the flat-rate loan, found by search rather than a closed formula. A good way to compare two loans quoted in different ways.