Some personal loans, two-wheeler loans and consumer durable loans are advertised at a flat rate that looks cheap. With a flat rate, interest is charged on the full loan amount for the whole tenure, even though you repay part of it every month. The reducing-balance rate, which charges interest only on what you still owe, shows the real cost. This calculator converts one into the other.
How to use the calculator
- Enter the loan amount.
- Enter the flat interest rate quoted by the lender.
- Enter the tenure in years.
How it works
Total interest (flat) = Loan × Flat rate × Years ÷ 100
EMI = (Loan + Total interest) ÷ Number of monthsThe calculator then finds the reducing-balance rate at which the same loan would have exactly the same EMI. That is the real rate you are paying.
Example
A ₹1,00,000 loan at a 10% flat rate for 3 years:
- Total interest = 1,00,000 × 10% × 3 = ₹30,000
- EMI = 1,30,000 ÷ 36 = ₹3,611
- Real reducing-balance rate = 17.92% a year
Flat rate vs real rate
| Flat rate | Tenure | Real reducing rate |
|---|---|---|
| 8% | 3 years | 14.55% |
| 10% | 3 years | 17.92% |
| 10% | 5 years | 17.27% |
| 12% | 5 years | 20.31% |
As a rough rule, the real rate is close to 1.7 to 1.9 times the flat rate.
Protect yourself
- Ask for the reducing-balance rate or the APR. RBI requires banks and NBFCs to give a Key Facts Statement showing the annual percentage rate (APR) for retail loans.
- Compare EMIs, not rates. For the same amount and tenure, the loan with the lower EMI is cheaper.
- Check fees. Processing fees and add-ons push the real cost even higher.
FAQ
What is a flat interest rate?
It is a rate charged on the original loan amount for the entire tenure, without reducing as you repay. It makes the loan look cheaper than it is.
What is a reducing-balance rate?
It is a rate charged only on the outstanding amount each month. Home loans and most bank loans use this method.
How do I convert a flat rate to a reducing rate?
Enter the loan details in the calculator. It works out the reducing-balance rate that gives the same EMI. Roughly, multiply the flat rate by about 1.8.
Which is better for the borrower?
A reducing-balance rate at the same number is always cheaper. Compare offers using the real rate or the EMI with the EMI calculator.