Get the Tata Capital App to apply for Loans & manage your account. Download Now

Blogs

SUPPORT

Menu  
 
Apply Now
Apply Now

Tata Capital > Blog > Personal Use Loan > Flat vs reducing interest rate: How it impacts your personal loan EMI

Personal Use Loan

Flat vs reducing interest rate: How it impacts your personal loan EMI

Flat vs reducing interest rate: How it impacts your personal loan EMI

Flat and reducing interest rates may look similar at first, but they can result in very different borrowing costs. A reducing balance loan is generally more economical because interest is charged only on the outstanding principal. Understanding the difference, converting flat rates correctly, and comparing the APR in the KFS can help you make the right financial decision.

A flat interest rate is calculated on the original loan amount throughout the tenure, while a reducing interest rate is charged only on the outstanding loan balance. 

A 10% flat interest rate is not the same as a 10% reducing interest rate. In fact, over a typical loan tenure, a flat rate often works out to roughly 1.7 to 1.9 times the equivalent reducing rate. That means a loan advertised at a 10% flat rate may cost almost the same as one offered at around 18% reduction. Understanding flat vs reducing interest rate is therefore essential before signing a loan agreement. This guide explains flat vs reducing interest rates, shows the math behind the difference, compares the EMI impact, and helps you evaluate two loan offers correctly.

What is a flat interest rate?

The flat interest rate meaning is simple. Under a flat interest rate, interest is calculated on the original loan amount for the entire tenure, even though your outstanding balance keeps reducing as you repay the loan. Because of this, the total interest payable is usually higher than under a reducing rate loan.

Below are the formulas for calculating interest and EMIs under a flat interest rate:

Interest = (Principal x Rate x Time) / 100

EMI = (Principal + Total Interest) / Number of months

What is a reducing balance interest rate?

Under a reducing balance interest rate, interest is calculated on the outstanding loan amount instead of the original loan amount. After every EMI payment, your outstanding loan balance reduces.

Although the EMI amount usually remains the same throughout the tenure, its composition changes over time. With time, the interest component gradually decreases and the principal repayment increases. 

Also Read – Tips for Lowering Home Loan Interest Rates

Flat vs reducing interest rate: A quick comparison

Let’s understand the impact of flat and reducing rate of interest through an example. Suppose you have borrowed Rs. 5 lakhs for 5 years. At a 10% flat interest rate, the interest will be calculated on the entire Rs. 5 lakhs throughout the tenure. It will come out to Rs. 2.5 lakh. However, at a 10% reducing rate, the interest payable will be Rs. 1,37,411.

For a detailed overview of the difference between flat and reducing interest rates, refer to the table below:

BasisFlat RateReducing Rate
Interest CalculationOn the original loan amount throughout the tenureOn the outstanding loan balance at a given point
EMIRemains fixedUsually remains fixed, but the composition changes
Total Interest PayableHigherLower
Typically Used ForShort-term and consumer durable loansLong-term loans, such as home loans, personal loans, and auto loans

How to convert a flat rate to a reducing rate?

An online flat-to-reducing rate converter makes comparison easy. Just enter the loan amount, quoted flat rate, and tenure to estimate the equivalent reducing rate, EMI, and total interest payable.

A 10% flat rate is roughly an 18% reducing rate. Suppose you take a loan of Rs. 10 lakh at a flat rate of 10% per annum. The table illustrates the converted reducing rates for various tenures:

Tenure (In Years)Indicative Converted Reducing Rate
217%
317.5%
418%
518.5%

Which is better: A flat or reducing interest rate?

At the same nominal rate, a reduced balance interest rate is always cheaper than a flat interest rate because interest is charged only on the outstanding loan amount. There is no situation where a 12% flat rate costs less than a 12% reducing rate. Before choosing a loan, always convert the quoted flat rate into its reducing-rate equivalent to make a fair comparison. 

Also Read – What is the base rate


How to compare loan offers properly?

From 1 October 2024, the Reserve Bank of India (RBI) requires banks and NBFCs to provide a Key Facts Statement (KFS) before sanctioning term loans. The KFS shows the Annual Percentage Rate (APR), which includes the interest rate, processing fee, and other mandatory charges, along with the amortization schedule. Instead of comparing flat or reducing rates, simply compare the APR across lenders.

Conclusion

Understanding flat vs reducing interest rates can save you a significant amount over the loan tenure. A reducing rate is always cheaper at the same nominal rate. The best way to compare loan offers is through the APR mentioned in the Key Facts Statement (KFS). You can also use the Tata Capital Personal Loan and EMI Calculator to make an informed borrowing decision.

Get an Instant Personal Loan for all your needs !

Apply now
Popular Searches
Term Loan Personal Loan for Government Employee Personal Loan for Salaried What is Personal Loan Personal Loan Prepayment Personal Loan Application Process 3 Lakh Personal Loan 4 Lakh Personal Loan 6 Lakh Personal Loan 7 Lakh Personal Loan 8 Lakh Personal Loan 9 Lakh Personal Loan
More About Loans
Instant Personal Loan personal loan emi calculator personal loan interest rate personal loan eligibility Marriage Loan Document Required for Personal Loan Home Renovation Loan Medical Loan Personal Loan Balance Transfer 5 Lakh Personal Loan Small Personal Loan Travel Loan Personal Loan for Women 2 Lakh Personal Loan 10 Lakh Personal Loan

FAQs

What is the difference between a flat and a reducing interest rate?

A flat rate charges interest on the original loan amount throughout the tenure. A reducing rate charges interest only on the outstanding balance after each EMI.

What is a flat interest rate?

A flat interest rate calculates interest on the full principal amount for the entire loan period, even though you keep repaying the loan every month.

Which is better, flat or reducing interest rate?

At the same quoted rate, a reducing interest rate is always more economical because interest is charged only on the remaining loan balance.

How do I convert a flat rate to a reducing rate?

Use a flat-to-reducing rate converter by entering the loan amount, flat rate, and tenure. It estimates the equivalent reducing rate, EMI, and total interest.

Is a 10% flat rate the same as a 10% reducing rate?

No. A 10% flat rate generally costs much more and is roughly equivalent to about 17-19% reducing, depending on the loan tenure.

Do personal loans in India use flat or reducing interest rates?

Most personal loans offered by banks and NBFCs in India use the reducing balance method, although some lenders may still quote flat rates.

What is APR and where do I find it?

APR is the total annual borrowing cost, including interest and mandatory charges. It is mentioned in the Key Facts Statement (KFS) provided by the lender.

Why do some lenders quote a flat interest rate?

Some lenders use flat rates because they appear lower and are easier to understand. Always compare the APR or equivalent reducing rate before deciding.
Disclaimer

Most Viewed Blogs

Trending Blogs

Calculator

Personal Loan EMI Calculator

Personal Loan EMI Calculator
Home Loan EMI Calculator

Home Loan EMI Calculator
Business Loan EMI Calculator

Business Loan EMI Calculator
Used Car Loan EMI Calculator

Used Car Loan EMI Calculator
Two Wheeler Loan EMI Calculator

Two Wheeler Loan EMI Calculator
Loan Against Securities Calculator

Loan Against Securities Calculator
Loan Against Property Calculator

Loan Against Property Calculator
More Tools
Our Subsidiaries
Our Private Equity Funds

Useful Links and Resources

Policies, Codes & Other Documents

Tata Capital Solutions & Services

Copyright © 2026 Tata Capital Limited

error-icon

Uh oh, something went wrong

Please try again later.

Most Important Terms & Conditions - Home Loans

Download in your preferred language

Download