You pay ₹0 more interest with the Flat Rate method.
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Understand the difference between flat and reducing rates to choose the right loan. Get expert advice on loan products.
Flat Rate vs. Reducing Balance Rate
When taking a loan, the method used to calculate interest significantly impacts your total repayment amount. The two common methods are Flat Rate and Reducing Balance Rate.
Flat Interest Rate
Interest is calculated on the **initial principal amount** for the entire loan tenure.
The interest amount remains constant throughout the loan period.
The total interest paid is generally much higher compared to the reducing balance method for the same quoted rate.
Often used for shorter-term loans like consumer durable loans or some personal loans. The quoted rate appears lower, but the effective interest rate is much higher.
Reducing Balance Interest Rate
Interest is calculated only on the **outstanding principal balance** of the loan, which reduces with each EMI payment.
As you repay the principal, the interest charged in subsequent EMIs decreases.
This is the standard method used for most home loans, car loans (often), and standard personal loans in India.
The effective interest rate is closer to the quoted rate.
Results in significantly lower total interest paid compared to the flat rate method for the same principal, rate, and tenure.
Why Compare?
Comparing the two methods helps you understand the true cost of a loan. A loan offered with a seemingly low flat interest rate can actually be much more expensive than a loan with a higher reducing balance interest rate. Always check which method is being used and compare the total interest payable.
Disclaimer: This calculator provides a comparison based on standard formulas. Loan offers may include additional fees or charges not accounted for here. Always verify the interest calculation method and all terms with the lender before signing any loan agreement.