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Flat Interest Vs Reducing Interest Rate Calculator

Compare flat interest vs reducing interest rates to understand the real cost of borrowing. Calculate EMI, total interest, and potential savings with our comprehensive calculator.

Loan Details

₹1L ₹1Cr
Principal amount you want to borrow
6% 25%
Annual interest rate offered by lender
1 Year 30 Years
Total loan repayment period

Interest Rate Comparison Results

Monthly EMI
₹22,000
Total Interest
₹3,20,000
Total Payment
₹13,20,000

Detailed Comparison: Flat vs Reducing Interest

Flat Interest Rate

Monthly EMI ₹22,000
Total Interest ₹3,20,000
Total Amount ₹13,20,000
Effective Rate 22.4%

Reducing Interest Rate

Monthly EMI ₹20,273
Total Interest ₹2,16,380
Total Amount ₹12,16,380
Effective Rate 12.0%

Advantages of Using Our Interest Rate Calculator

Side-by-Side Comparison

Compare flat and reducing interest rates instantly to understand the real cost difference and make informed borrowing decisions.

Accurate Calculations

Get precise calculations using standard mathematical formulas for both flat and reducing interest rate methods.

Visual Charts

Interactive charts help you visualize the difference between flat and reducing interest calculations clearly.

Savings Analysis

Instantly see how much you can save by choosing reducing interest over flat interest rate loans.

Multiple Scenarios

Test different loan amounts, interest rates, and tenures to find the most cost-effective borrowing option.

Free & Easy to Use

No registration required. Use our calculator unlimited times to compare interest rate options before taking a loan.

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Interest Rate Tips

  • Always ask lenders to specify flat or reducing rate
  • Reducing rates are significantly cheaper than flat rates
  • Check the effective interest rate for true comparison
  • Read loan documents carefully for interest calculation method
  • Consider processing fees and other charges too
  • Compare multiple lenders before deciding

Understanding Flat Interest vs Reducing Interest Rates

When taking a loan, understanding how interest is calculated can save you thousands of rupees. There are two primary methods of interest calculation: flat interest rate and reducing interest rate. Each method significantly impacts your total interest burden.

What is Flat Interest Rate?

A flat interest rate is calculated on the entire principal amount throughout the loan tenure. Even as you repay the principal, the interest is always calculated on the original loan amount. This makes flat interest rates more expensive despite appearing lower.

Flat Interest = (P × I × T) / 100
Where:
P = Principal Amount
I = Annual Interest Rate
T = Tenure in Years

What is Reducing Interest Rate?

A reducing interest rate (also called diminishing balance) is calculated only on the outstanding principal amount. As you repay EMIs, the principal reduces, and interest is charged only on the remaining balance. This method is more borrower-friendly and cost-effective.

Reducing Interest = Outstanding Balance × (Rate/12)/100
The interest reduces with each EMI payment as the outstanding balance decreases

Key Differences Between Flat and Reducing Interest

Aspect Flat Interest Rate Reducing Interest Rate
Calculation Method Interest calculated on original loan amount throughout tenure Interest calculated on outstanding principal amount
Total Interest Higher total interest payment Lower total interest payment
EMI Amount Fixed EMI throughout tenure Fixed EMI but interest portion decreases over time
Effective Rate Nearly double the quoted rate Same as quoted rate
Prepayment Benefit Minimal or no benefit from prepayment Significant savings from prepayment

Why Choose Reducing Interest Rate?

Reducing interest rates are more transparent and cost-effective. Banks and financial institutions typically use reducing rates for home loans, car loans, and personal loans. Always verify the interest calculation method before signing any loan agreement.

Example Calculation

For a ₹10 lakh loan at 12% interest for 5 years:

  • Flat Interest: Total interest = ₹6,00,000, EMI = ₹26,667
  • Reducing Interest: Total interest = ₹3,31,680, EMI = ₹22,197
  • Savings: ₹2,68,320 by choosing reducing interest!

Frequently Asked Questions about Interest Rates

What is the difference between flat and reducing interest rates?

Flat interest is calculated on the original loan amount throughout the tenure, while reducing interest is calculated only on the outstanding balance, making it significantly cheaper.

Why do flat interest rates seem lower but cost more?

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.

Which banks use reducing interest rates?

Most banks and NBFCs use reducing interest rates for home loans, car loans, and personal loans. Always confirm the calculation method before taking any loan.

How much can I save with reducing interest?

Savings can be substantial - typically 40-50% of total interest cost compared to flat interest rates, depending on the loan amount and tenure.

Do credit cards use flat or reducing interest?

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

Can I convert flat interest loan to reducing interest?

Generally not possible to convert existing loans, but you can consider refinancing with a lender offering reducing interest rates if it's cost-effective.

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