Flat vs Reducing Rate Calculator
Flat Rate Loan
Reducing Balance
Flat Rate Structure
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Reducing Balance Structure
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Flat vs Reducing Rate Calculator
What Is the Flat vs Reducing Rate Calculator?
A Flat vs Reducing Rate calculator helps borrowers understand the actual cost of a loan by comparing two commonly used interest calculation methods. While both may quote the same interest rate, the total interest paid can differ significantly depending on how the interest is calculated.
This calculator compares EMIs and total interest under both methods, making it easier to identify the true effective cost and choose the more economical loan or funding option.
What Is the Flat vs Reducing Rate Calculator Formula?
The calculator compares interest using two different approaches:
Flat Rate MethodInterest is calculated on the original loan amount for the entire tenure.
Interest is calculated on the outstanding loan balance, which reduces every month.
Although the quoted percentage may look the same, a flat rate usually results in a much higher interest outgo than a reducing rate.
Example
Loan amount: ₹1,00,000
Tenure: 1 year
Interest rate: 10%
- Flat Rate Interest: ₹10,000
- Reducing Rate Interest Rate: approximately ₹5,500
The flat rate results in nearly double the interest for the same quoted rate.
Difference Between Flat and Reducing Rates
The key difference lies in the effective cost. Under a flat rate, you continue to pay interest on the full loan amount even after repaying a portion of the principal. In contrast, a reducing rate charges interest only on the outstanding balance.
Reality Check
A 10% flat rate is roughly equivalent to an 18% reducing rate in terms of effective cost.
Flat Rate vs Reducing Rate
| Feature | Flat Rate Method | Reducing Rate Method |
|---|---|---|
| Total Interest Cost | Higher | Lower |
| Transparency | Looks cheaper but isn’t | Reflects actual cost |
| EMI Structure | Fixed, simple | Fixed EMI, changing split |
| Prepayment Benefit | Limited | High |
How to Use the Flat vs Reducing Rate Calculator?
- Add loan Amount
- Add loan tenure
- Quoted Flat Interest Rate
- Quoted Reducing Interest Rate
Once entered, the calculator instantly shows EMIs, total interest payable, and the effective difference between the two methods.
