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What is the difference between flat and reducing balance interest rate?
Updated · CardKhoj Editorial Team
Short answer
A flat rate charges interest on the original loan amount for the whole tenure, even as you repay it. A reducing balance rate charges interest only on the amount still outstanding. So a 10% flat rate costs roughly the same as an 18% reducing rate — always compare loans on the reducing rate or APR.
Example: ₹1,00,000 for 3 years
| 10% flat | 10% reducing | |
|---|---|---|
| Interest calculated on | ₹1,00,000 every year | Remaining balance only |
| Total interest | ₹30,000 | ≈ ₹16,160 |
| Monthly EMI | ≈ ₹3,611 | ≈ ₹3,227 |
| Equivalent reducing rate | ≈ 17.9% | 10% |
Where flat rates appear
Flat rates are common in some car, two-wheeler and consumer-durable loans, and in offers from smaller lenders, because the number looks lower. Banks' home and personal loans are almost always quoted on a reducing basis.
How to protect yourself
Ask for the Annual Percentage Rate (APR). RBI requires lenders to give you a Key Fact Statement showing the APR — the all-in annual cost including fees — before you sign.
This answer is general information, not personalised financial or tax advice. Rules, rates and limits change — confirm with your bank, the RBI or a qualified adviser before making decisions.