Flat Interest Vs Reducing Interest Rate Calculator

Flat interest is calculated on the original loan amount throughout the tenure, while reducing interest is calculated only on the outstanding balance. This makes reducing interest significantly cheaper as the interest amount decreases with each EMI payment.

Flat rates appear lower because they're quoted on the original amount, but since interest doesn't reduce with principal repayment, the effective rate is nearly double the quoted rate. This makes flat interest much more expensive than reducing interest.

Most banks and NBFCs use reducing interest rates for home loans, car loans, and personal loans. However, some small finance companies and informal lenders may still use flat rates. Always confirm the calculation method before taking any loan.

Savings can be substantial - typically 40-50% of total interest cost compared to flat interest rates, depending on the loan amount and tenure. For a ₹10 lakh loan, you could save over ₹2.5 lakhs by choosing reducing over flat interest.

Credit cards typically use reducing balance method for calculating interest on outstanding amounts, but rates are much higher than term loans. The interest is calculated daily on the outstanding balance.

Generally not possible to convert existing loans, but you can consider refinancing with a lender offering reducing interest rates if it's cost-effective. Calculate the total cost including processing fees before making the switch.

The effective interest rate for flat interest loans is typically 1.8 to 2 times the quoted rate. For example, a 12% flat rate translates to an effective rate of approximately 22-24%, making it much more expensive than reducing rates.

Ask your lender directly about the interest calculation method. Check loan documents for terms like "flat rate," "reducing balance," or "diminishing balance." If the EMI seems unusually high for the quoted rate, it might be flat interest.