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About the Flat vs Reducing Rate Calculator
Under a flat rate, interest is charged on the original loan amount for the whole tenure, regardless of how much you have already repaid. Under a reducing balance rate — the standard for home, personal and most bank loans — interest is charged only on what you still owe.
The difference is not small. A flat rate is roughly equivalent to 1.7–1.9 times the same number quoted on a reducing basis. A dealer offering "9% flat" is charging about 16% in real terms, and nothing in the paperwork will say so.
The formula
The equivalent reducing rate is found by solving for the rate that produces the same EMI.
Things worth knowing
Frequently asked questions
Interest calculated on the full original loan amount for the entire tenure, then divided equally across the EMIs. You keep paying interest on money you have already repaid.
Because the number sounds much lower. A 9% flat quote is a genuine 16% or so on a reducing basis — the structure exists to make an expensive loan look cheap.
Only if the flat number is low enough that its reducing equivalent still beats the alternative. Convert first, then compare. Never compare a flat rate with a reducing rate directly.
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