Flat vs Reducing Rate Calculator
Flat vs Reducing Rate Calculator
Turn a flat interest rate into the reducing-balance rate that charges the same EMI, or a reducing rate into its flat equivalent, with the EMI and total interest both ways.
Flat to reducing rate
$5,00,000 at 10% flat for 36 months
Flat and reducing-balance EMIs
- P
- the loan amount
- f, r
- the annual rate, flat or reducing, as a decimal
- n
- the number of monthly EMIs
- flat equivalent
- (EMI × n − P) ÷ (P × n ÷ 12): the total interest spread evenly over the original amount
- reducing equivalent
- the i at which the EMIs, discounted, equal P; found by 24 halvings of an interval (0 to EMI ÷ P) proven to contain it, accurate to 0.00001 percentage points
Worked example
$5,00,000 at 10% flat for 36 months
Interest = 5,00,000 × 10% × 3 = $1,50,000
EMI = (5,00,000 + 1,50,000) ÷ 36 = $18,056
The reducing rate at which 36 EMIs of $18,056 repay 5,00,000 exactly: 17.92% a year
The same 10% on a reducing balance: EMI $16,134, interest $80,809, so the flat quote costs $69,191 more
Flat rates and their reducing-balance equivalents
| Flat rate | 12 months | 24 months | 36 months | 60 months |
|---|---|---|---|---|
| 7% flat | 12.68% | 12.91% | 12.83% | 12.50% |
| 9% flat | 16.22% | 16.43% | 16.24% | 15.71% |
| 10% flat | 17.97% | 18.16% | 17.92% | 17.27% |
| 12% flat | 21.46% | 21.57% | 21.20% | 20.31% |
Why a flat rate is not the rate you pay
Some lenders in India quote a flat rate, especially for two-wheeler, used-car and consumer loans. Flat interest is worked out on the full amount borrowed for the whole tenure, even though every EMI repays part of it, so after half the tenure you are still paying interest on money you have already returned. A reducing-balance rate charges interest only on what you still owe each month. It is how an ordinary EMI is priced, and the only basis on which two loans can be compared.
On the example, 10% flat on $5,00,000 for three years costs $1,50,000 in interest and an EMI of $18,056. The reducing rate that gives exactly that EMI is 17.92%, about 1.8 times the flat figure. Going the other way, 14% reducing over three years is the same as 7.68% flat. No formula turns a flat rate into its reducing equivalent, so the page searches for it, halving an interval that is proven to contain the answer 24 times; the result is accurate to far better than the two decimals shown.
What to ask for. Since 1 October 2024 the Reserve Bank of India has required banks and other regulated lenders to give every retail and MSME term-loan borrower a Key Facts Statement that shows the Annual Percentage Rate, which is a reducing-balance rate that also counts processing fees and other charges. The APR will therefore be at or above the equivalent rate this page shows. Compare offers on the APR, and use this page to check a flat quote before you get that far.
How this page differs from two others. The murabaha calculator does the same conversion for Islamic cost-plus sale finance, where the bank sells you the asset at a profit rather than lending, and adds a year-by-year view of the profit not yet earned. The car loan EMI calculator works from the car’s price and your down payment, on a reducing rate. This page is the general converter for any flat-rate quote, in either direction. For fees on top of the rate, use the personal loan EMI calculator. This is arithmetic on the figures you enter, not financial advice.
Frequently asked questions
How do I convert a flat rate to a reducing rate?
Work out the flat EMI, then find the reducing rate at which that EMI repays the loan exactly over the same months. 10% flat over 36 months is 17.92% reducing. There is no exact formula; the page solves for it.
Is a flat rate of 10% the same as 20% reducing?
Roughly, but not exactly. Doubling is a rule of thumb: 10% flat is 17.92% reducing over 3 years and a little less over longer tenures. See the table.
Which is better, a flat rate or a reducing rate?
Neither basis is cheaper in itself. What matters is the total cost. Convert both offers to the same basis, ideally the APR in the Key Facts Statement, and compare.
Does prepaying a flat-rate loan save interest?
It depends on the loan agreement. Some flat-rate loans work out the interest saved on prepayment on the reducing basis, and some charge a foreclosure fee. Ask the lender for the payoff figure in writing.
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References
- Reserve Bank of India. Key Facts Statement (KFS) for Loans & Advances, circular RBI/2024-25/18 DOR.STR.REC.13/13.03.00/2024-25, 15 April 2024: a KFS with the Annual Percentage Rate for all retail and MSME term loans from 1 October 2024. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12663&Mode=0
- Central Bank of the UAE. Regulation No. 29/2011, Article 6: a bank advertising a flat rate must state the equivalent effective rate beside it. https://rulebook.centralbank.ae
- Brealey, R. A., Myers, S. C. and Allen, F. Principles of Corporate Finance. McGraw-Hill: annuities and the internal rate of return.