Flat Rate to Reducing Rate

Flat rate charges interest on the full original principal for every installment of the tenure. Reducing balance charges interest only on the principal still outstanding, which shrinks with each payment — so a flat rate loan costs meaningfully more than a reducing-balance loan quoted at the same headline percentage.

A flat rate looks like a lower number than the equivalent reducing-balance rate, which can make an offer appear cheaper than it actually is — this is common for vehicle and consumer durable loans.

It varies with tenure, but as a rule of thumb the effective reducing-balance rate is typically noticeably higher than the stated flat rate — precisely how much higher depends on the tenure length, which this calculator computes exactly rather than approximates.

Whenever you're comparing a loan quoted with a flat rate (common for two-wheeler, consumer durable, or some personal loans) against another loan quoted with a reducing-balance rate, so you're comparing like with like.

The flat interest rate and the loan tenure — from these, the equivalent reducing-balance rate is derived.