A flat rate charges interest on the full loan for the whole term, even as you repay it; a reducing rate charges only on what you still owe. So 12% flat over 12 months is really 21.46% reducing, about 1.8 times as much.
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What does a flat interest rate mean?
With a flat rate, interest is worked out once, on the full loan amount, for the whole term. It does not go down as you repay. The interest is added to the loan and the total is split into equal instalments.
Interest = loan × flat rate × years
Instalment = (loan + interest) ÷ months
₹1,00,000 at 12% flat for 12 months: interest ₹12,000, instalment ₹9,333 a month. By month 12 you owe only one instalment, yet you are still paying interest as if you had the full ₹1,00,000.
What is a reducing balance rate?
With a reducing (or reducing-balance) rate, each month's interest is charged only on the amount you still owe. Every EMI pays that interest and repays part of the loan, so the next month's interest is smaller.
This month's interest = balance owed × yearly rate ÷ 12 ÷ 100
₹1,00,000 at 12% reducing for 12 months: EMI ₹8,885, total interest ₹6,618. The first month's interest is ₹1,000; by the last month it is ₹87.96. The EMI formula shows how the EMI is worked out.
Same loan, flat vs reducing
| 12% flat | 12% reducing | |
|---|---|---|
| Monthly instalment | ₹9,333 | ₹8,885 |
| Total interest | ₹12,000 | ₹6,618 |
| Total repaid | ₹1,12,000 | ₹1,06,618 |
| Real (reducing) rate a year | 21.46% | 12% |
| In sekda | ₹1.79 | ₹1 |
Both are called "12%", but the flat loan costs ₹5,382 more and its real rate is 21.46% a year. Whenever you hear a rate, the first question is: flat or reducing?
Look at month 12. Spread evenly over the year, the flat interest is ₹1,000 every month, so month 12 still carries ₹1,000 of interest when only ₹8,333 of the loan is left to repay. The reducing loan charges ₹87.96 that month.
Who quotes flat rates, and who quotes reducing?
Two-wheeler, used-car and consumer-durable offers, and some personal-loan offers, are often quoted flat. Practice varies from lender to lender, so never assume. Ask "Is this rate flat or reducing?", get the answer in writing, and ask for the APR in the Key Fact Statement.
Flat rate vs IRR: what the dealer's sheet means
A quote sheet may show two rates: the flat rate and the IRR. The flat rate is worked on the full loan for the whole term. The IRR (internal rate of return) is the reducing rate: the rate at which your instalments repay the loan when interest is charged only on what you still owe. The IRR is the one to compare with a bank loan or another offer.
Try it in the calculatorTurn any flat quote into its IRR, with the fee and advance EMIs, in the flat rate calculator.Flat to reducing rate conversion table
Find your flat rate on the left and the loan term across the top. The answer depends only on the flat rate and the number of months, not on the loan amount.
| Flat rate | 12 months | 24 months | 36 months | 60 months |
|---|---|---|---|---|
| 8% | 14.45% | 14.68% | 14.55% | 14.13% |
| 10% | 17.97% | 18.16% | 17.92% | 17.27% |
| 12% | 21.46% | 21.57% | 21.20% | 20.31% |
| 15% | 26.62% | 26.58% | 25.98% | 24.68% |
| 18% | 31.72% | 31.46% | 30.59% | 28.88% |
Reducing to flat rate conversion table
Going the other way shows what a bank's rate looks like in simple-interest terms: the flat rate that would cost the same total interest.
| Reducing rate | 12 months | 36 months | 60 months |
|---|---|---|---|
| 9% | 4.94% | 4.83% | 4.91% |
| 10.5% | 5.78% | 5.67% | 5.79% |
| 12% | 6.62% | 6.52% | 6.69% |
| 14% | 7.74% | 7.68% | 7.92% |
| 16% | 8.88% | 8.86% | 9.18% |
So a bank's 12% reducing over one year is only 6.62% flat. Don't let that make a bank loan look cheaper than it is: EMI vs simple interest explains why the reducing rate is the one to compare with sekda and other loans.
How to convert a flat rate to a reducing rate yourself
There is no one-line formula, but the method is simple: find the reducing rate whose EMI matches the flat instalment.
- Work out the flat instalment: (loan + flat interest) ÷ months. For 12% flat on ₹1,00,000 over 12 months that is ₹9,333.33.
- Guess a reducing rate and work out its EMI. At 20% the EMI would be ₹9,263.45: too low. At 22% it would be ₹9,359.44: too high. So the answer is in between.
- Keep narrowing the gap until the EMI matches. You land on 21.46%.
In Excel or Google Sheets the RATE function does the narrowing for you: =RATE(12, -9333.33, 100000)*12 gives 21.46%. Or use the flat rate calculator, which also counts the processing fee and advance EMIs.
Rule of thumb: reducing is about 1.7 to 1.8 times flat
Divide each reducing rate in the first table by its flat rate. For loans of 1 to 3 years the answer stays between 1.7 and 1.83. For 5-year loans it is 1.6 to 1.77, lower at higher rates. It never reaches 2, so "about double" overstates the real rate, and so does a fixed 1.84, which you may see in some tables.
Reducing rate ≈ flat rate × 1.7 to 1.8
For loans of 1 to 3 years. Use it for a quick check; use the flat rate calculator for the exact figure.
Why not exactly double? Over an instalment loan you hold, on average, a little more than half the loan: the balance comes down gradually, and the early instalments, which carry more interest, repay less of the loan than the later ones. Flat interest is charged on the whole loan, so the true rate on what you actually hold comes out a little under twice the flat rate.
What does a monthly reducing rate mean?
"Monthly reducing" means the interest is worked out every month on the balance left after the last instalment. The rate is still quoted per year: 12% monthly reducing is 1% a month on what you still owe, the same as ₹1 sekda. All the reducing rates on this page are monthly reducing.
If a loan reduces the balance less often, say once a year, interest is charged on the opening balance for the whole year even after you have repaid part of it, so it costs more at the same quoted rate. Check which one your loan agreement uses.
How to compare two loan offers
- Same amount and same months? The lower monthly instalment is the cheaper loan, before fees.
- Convert every flat rate to a reducing rate.
- Count the processing fee and any other upfront charges: work the rate out on the money you actually receive.
- Compare the final reducing rates. The lower one wins.
Ask for the APR in the Key Fact Statement
Under RBI rules, banks and NBFCs give borrowers a Key Fact Statement (KFS) before a retail or MSME loan is signed. It shows the Annual Percentage Rate (APR): the yearly cost of the loan including fees and charges. When you compare loans from regulated lenders, compare the APRs. For a private lender or a shop scheme with no KFS, convert the rate yourself with the steps above.
8 short answersFlat vs reducing rate: common questions
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What is the difference between flat and reducing interest rate?
A flat rate charges interest on the full loan for the whole term, even as you repay it; a reducing rate charges interest only on what you still owe. So the same number costs different amounts: on ₹1,00,000 over 12 months, 12% flat is ₹12,000 of interest and 12% reducing is ₹6,618.
Which is better, a flat or a reducing interest rate?
At the same number, reducing is always cheaper. A flat offer wins only if, converted to a reducing rate with fees counted, it comes out lower. On ₹2,00,000 for 36 months, 9% flat is really 16.24%, so 14% reducing with a ₹4,000 fee (15.43%) is the cheaper loan.
Is there a formula to convert a flat rate to a reducing rate?
Not an exact one-line formula, because the reducing rate sits inside the EMI formula and has to be found by trial. For a quick estimate on loans of 1 to 3 years, multiply the flat rate by 1.7 to 1.8. For the exact figure use our flat rate calculator: 12% flat over 12 months is 21.46% reducing.
Is a flat rate the same as a fixed rate?
No. Flat or reducing is about how interest is worked out: on the full loan, or only on what you still owe. Fixed or floating is about whether the rate can change during the loan. So a loan can be fixed and flat, fixed and reducing, or floating and reducing.
How do I know if my loan is on a flat or a reducing rate?
Check the total interest in your repayment schedule. If it equals loan × rate × years, the rate is flat: 12% flat on ₹1,00,000 for a year is ₹12,000. At 12% reducing it would be only ₹6,618. Banks and NBFCs must also give you a Key Fact Statement showing the APR, the yearly cost including all charges.
How is the EMI calculated on a flat interest rate?
Work out the interest on the full loan, add it to the loan, and divide by the months. ₹50,000 at 10% flat for 2 years: interest ₹10,000, so the instalment is ₹60,000 ÷ 24 = ₹2,500 a month. That matches a reducing rate of 18.16%, not 10%.
What is 1% a month flat in yearly terms?
1% a month flat is 12% a year flat, charged on the full loan. Because you repay in instalments, the real cost on what you still owe is higher: on a 12-month loan it is 21.46% a year reducing, about ₹1.79 sekda. Compare that figure, not the 1%.
What does monthly reducing rate mean?
It means the interest is worked out every month on the balance still owed after the last instalment. The rate is quoted per year, so 12% monthly reducing is 1% a month on what you owe, the same as ₹1 sekda. The standard EMI formula works this way.