Flat vs Reducing: True Cost
Last updated: September 2026.
Flat offer
₹18,889/mo
Total: ₹6,80,000 · Interest: ₹1,80,000
Reducing offer
₹17,089/mo
Total: ₹6,15,197 · Interest: ₹1,15,197
Verdict
Reducing wins
by ₹64,803
Flat: EMI = (P + P × r × T) ÷ n · Reducing: EMI = P × r × (1+r)ⁿ ÷ ((1+r)ⁿ − 1), r = monthly rate, n = months
How to use this comparator
- Enter the loan amount and tenure once — it applies to both sides.
- Type the agent's flat rate on the left and the bank's reducing rate on the right.
- The verdict line tells you which is truly cheaper and by how much.
What is this tool?
Some lenders quote flat interest rates that look cheap but cost far more than reducing-balance rates. This comparator puts any flat offer side by side with a reducing offer on the same loan. Use it whenever anyone quotes a flat rate — especially used-car and gold loans.
The flat-rate trick, exposed
Flat rate charges interest on the ORIGINAL principal for the whole tenure — even after you've repaid half. Reducing balance charges only on what you still owe. That's why 12% flat costs about the same as 21% reducing over 3 years.
Flat quotes hide in used-car loans, gold loans, consumer-durable finance and informal lending. If anyone quotes flat, convert before comparing.
Ask for the APR or Key Fact Statement. A reducing rate on paper is the only number that compares fairly.
Read the full Real Loan & EMI Guide →
This tool gives an estimate for guidance only. It is not financial advice. Confirm rates with your bank or RBI before deciding.
Common flat-rate questions
How do I convert flat rate to reducing?
Rough rule: reducing ≈ flat × 2n/(n+1), where n is tenure in months. A 3-year 12% flat loan ≈ 21% reducing. Use the comparator above for exact numbers.
Why do dealers quote flat rates?
Because 9–12% flat sounds cheap next to 14–16% reducing — while costing the same or more. Always ask: flat or reducing?
Is flat rate ever better?
Almost never at equal numbers. It only wins if the flat offer's total outflow is genuinely lower — which this page will show you.
Worked example: ₹2 lakh at 10% flat for 2 years
- Flat interest = ₹2,00,000 × 10% × 2 = ₹40,000, so EMI = ₹2,40,000 ÷ 24 = ₹10,000.
- Solving the same ₹10,000 EMI on a reducing balance gives about 1.5% a month — roughly 18% a year.
- So a '10% flat' offer costs nearly as much as an 18% reducing-balance loan.
How the Flat vs reducing rate comparator works: the rules
- A flat rate charges interest on the full original amount for the whole tenure, even after you have repaid most of it.
- A reducing rate charges interest only on the outstanding balance each month — the method used for home loans and most bank loans.
- As a rule of thumb, the effective reducing rate of a flat loan is about 1.8–1.9 times the flat rate. The Key Fact Statement must show the APR so you can compare.
Flat vs reducing rate comparator: frequently asked questions
What is a flat interest rate?
Interest calculated on the full loan amount for the whole tenure, so you keep paying interest on money you have already repaid.
Which is cheaper: flat or reducing rate?
Reducing rate, almost always. A 10% flat rate equals roughly 18% on a reducing balance for a 2-year loan.
Why do some lenders quote flat rates?
Flat rates look lower in advertisements. Consumer durable, two-wheeler and some small business loans still use them.
How do I convert a flat rate to a reducing rate?
Enter the flat rate and tenure in this comparator — it finds the reducing rate that gives the same EMI.
Does a longer tenure make a flat loan worse?
Yes. The longer the tenure, the bigger the gap between the flat rate and the effective reducing rate.
What should I ask the lender?
Ask for the Key Fact Statement and the APR, which includes fees and shows the true yearly cost.
Official sources: RBI — Key Fact Statement for loans and advances· Last reviewed 2026-10-30. Results are estimates — confirm final figures with your lender, insurer or tax adviser.