A dealer says the car or phone loan is ‘only 10%’. A bank quotes 14% for a personal loan. The dealer’s offer looks cheaper, but it is usually far more expensive, because it is a flat rate.
How each rate works
- Reducing balance: interest is charged only on what you still owe. As you repay, the interest part of each EMI falls. Home loans and most bank loans work this way.
- Flat rate: interest is charged on the full original amount for the whole tenure, even though you have repaid most of it by the end.
₹5 lakh example
₹5 lakh for 3 years at 10% flat: interest = 5,00,000 × 10% × 3 = ₹1,50,000. EMI = ₹6,50,000 ÷ 36 ≈ ₹18,056.
The same ₹18,056 EMI on a ₹5 lakh, 3-year reducing-balance loan implies an interest rate of about 17.9%.
Rule of thumb
A flat rate is roughly 1.7–1.9 times the equivalent reducing rate for typical 1–5 year loans.
Where flat rates show up
Consumer durable finance, some two-wheeler and used-car loans, and some small-ticket personal loans from NBFCs and dealers. ‘No-cost EMI’ offers are a different trick: the interest is usually built into the price or offset by a discount you give up.
How to compare offers
- Ask for the APR or reducing-balance rate in writing; lenders must state it in the key fact statement.
- Compare EMIs for the same amount and tenure, and add processing fees.
- Check prepayment terms: on a flat-rate loan, prepaying often saves far less interest than you expect.
Calculators for this guide
Finkoin tip
Convert any flat-rate offer to its real reducing rate before you sign.
Try it on Finkoin →FAQs
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