Flat vs Reducing Rate Calculator

Flat rate charges interest on the ORIGINAL loan amount throughout the tenure. Reducing rate (diminishing balance) charges interest only on the REMAINING balance, which decreases as you repay. A 10% flat rate is roughly equivalent to 17-18% reducing rate. Banks use reducing rate; NBFCs and car dealers often quote flat rate to make loans look cheaper.

The approximate formula is: Reducing Rate = Flat Rate × 2N / (N+1), where N is total loan months. For a 3-year loan: multiply flat rate by 1.85. For 5-year: multiply by 1.9. For 7-year: multiply by 1.93. Example: 8% flat rate on a 5-year loan = approximately 15.3% reducing rate.

NBFCs quote flat rates because the number looks much lower and more attractive. A 10% flat rate sounds cheaper than 18% reducing rate, even though they cost the same. RBI mandates banks to quote reducing rates, but many NBFCs, car dealers, two-wheeler finance companies, and fintech apps still advertise flat rates. Always ask for the reducing rate before signing.

Car loans from dealers (not banks), two-wheeler loans, personal loans from NBFCs (Bajaj Finance, Tata Capital), consumer durable loans (Bajaj EMI Card), gold loans from local lenders, and some fintech app loans. Banks like SBI, HDFC, ICICI always quote reducing rate. If someone quotes a rate that seems too good, it is probably flat rate.

On a ₹5 lakh loan at 10% for 5 years: Flat rate total interest = ₹2,50,000. Reducing rate total interest = ₹1,37,000. You pay ₹1,13,000 extra — that is 82% more interest! The difference increases with longer tenures. This is why flat rate is the biggest hidden cost in Indian personal loans.