Why does a 10% flat rate cost more than a 10% reducing rate?

A flat rate charges interest on the full original principal for the entire tenure, even as you repay it monthly. A reducing rate only charges interest on the outstanding balance, so the same stated rate results in very different total interest.

Which method do most loans use today?

Most formal bank loans (home, car, personal) use the reducing balance method. Flat rates are more common in some personal loans, gold loans, and informal lending.

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Flat vs Reducing Rate Calculator

See why a flat interest rate looks cheaper than it is — compare it against the equivalent reducing balance EMI.

Loan details

Loan amount ₹5,00,000

Flat interest rate (annual) 10%

Tenure (years) 3 yrs

Comparison

Effective reducing rate

Flat rate EMI₹0

Flat rate total interest₹0

Equivalent reducing EMI₹0

Why flat rate loans cost more than they look

Flat interest = P × R × N (years)
Flat EMI = (P + Flat interest) ÷ (N × 12)
Effective reducing rate found by solving: EMI(flat) = EMI(reducing) for r

A flat rate charges interest on the full original principal for the whole tenure, even though you've been repaying it monthly. A reducing balance loan only charges interest on what's still outstanding — so a "10% flat" loan is usually equivalent to a reducing rate of roughly 18–19%, not 10%.

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Figures are estimates for planning purposes only and do not constitute financial advice.