Flat vs Reducing Interest Calculator

How to use Flat vs Reducing Interest Calculator

1. Choose the direction: flat to reducing, or reducing to flat.
2. Enter the loan amount, the quoted rate and the tenure.
3. Read the equivalent rate, EMI and total interest.
4. Use the side-by-side table to see what the same number would cost as a reducing-balance loan.

Two ways to charge interest

With a flat rate, interest = principal x flat rate x years, added to the principal and split equally across all months. EMI = (P + P x f x t) / n. With a reducing-balance rate, each month's interest is charged only on what you still owe, using the standard EMI formula.

Since you repay principal gradually, your average balance owed is far below the original amount, yet a flat loan keeps charging on the full sum. The equivalent reducing rate is the monthly rate i for which P = EMI x (1 - (1 + i)^-n) / i, multiplied by 12. This tool solves it by bisection.

A verified worked example

Borrow 1,00,000 for 3 years (36 months) at a flat 8%. Interest is 1,00,000 x 8% x 3 = 24,000, so the EMI is 1,24,000 / 36 = 3,444.44. Solving for the reducing rate gives about 14.55% nominal per year (15.56% compounded).

If 8% were a reducing rate instead, the EMI would be 3,133.64 and the interest far lower. In the other direction, a reducing-balance rate converts to a flat rate by dividing total interest by principal x years.

• Always compare loans on the reducing or effective rate.
• Ask whether fees are charged on top; they raise the true cost further.
• Prepaying a flat-rate loan often saves less than on a reducing loan, so check the foreclosure terms.
• Use the reducing-to-flat direction when a lender quotes a flat figure and you want to see what reducing rate you were comparing it against.
• A higher flat rate over a shorter tenure can still be cheaper in rupees than a lower flat rate over a long tenure, so compare total interest as well as the rate.

Limits and privacy

The tool assumes equal monthly instalments and no fees. Real contracts may add charges that push the true cost higher. Estimates only, not financial advice. Example values in the fields are not current market rates; always use the figures in your lender's sanction letter.

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Why use this flat vs reducing interest calculator tool

• True rate via IRR. The equivalent reducing rate is found numerically from the EMI cash flows.
• Both directions. Also converts a reducing rate into the flat rate that would charge the same total interest.
• Side-by-side comparison. EMI and total interest for a flat loan against a reducing loan at the same quoted number.
• Compounded view. Shows the effective annual rate as well as the nominal one.

Frequently asked questions

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