Flat vs Reducing Rate Calculator: convert a flat rate to the real rate
Dealers and some lenders give a flat rate. Banks give a reducing rate. The two numbers are not the same. Convert one to the other before you compare loan offers.
Rule: a flat rate is approximately 1.8 times smaller than the reducing rate with the same EMI. 8% flat for 36 months is 14.55% reducing.
Formula: flat EMI = (loan + loan × flat rate × years) ÷ months. The calculator finds the reducing rate that gives the same EMI.
Flat rate to reducing rate: the table
The reducing rate that gives the same EMI as each flat rate. A flat rate is approximately 1.8 times smaller than its reducing rate for all usual tenures.
| Flat rate | 12 months | 24 months | 36 months | 48 months | 60 months | 84 months |
|---|---|---|---|---|---|---|
| 5% flat | 9.10% | 9.32% | 9.31% | 9.24% | 9.15% | 8.97% |
| 6% flat | 10.90% | 11.13% | 11.08% | 10.97% | 10.85% | 10.58% |
| 7% flat | 12.68% | 12.91% | 12.83% | 12.68% | 12.50% | 12.16% |
| 8% flat | 14.45% | 14.68% | 14.55% | 14.35% | 14.13% | 13.69% |
| 9% flat | 16.22% | 16.43% | 16.24% | 15.99% | 15.71% | 15.19% |
| 10% flat | 17.97% | 18.16% | 17.92% | 17.60% | 17.27% | 16.66% |
| 12% flat | 21.46% | 21.57% | 21.20% | 20.75% | 20.31% | 19.50% |
| 14% flat | 24.91% | 24.92% | 24.40% | 23.82% | 23.25% | 22.24% |
How the two rates work
Flat rate: the lender calculates the interest on the full loan for the full tenure. This includes the part of the loan that you repaid before. EMI = (loan + loan × flat rate × years) ÷ months.
Reducing rate: each month, the lender calculates the interest only on the balance that is left. Home loans and most bank loans use this method. EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1), where r is the yearly rate ÷ 12 ÷ 100.
Example: ₹1,00,000 at 8% flat for 36 months gives an EMI of ₹3,444 and interest of ₹24,000. The same EMI at a reducing rate is 14.55% a year. Thus, compare a flat-rate offer with a bank's reducing rate only after you convert it.
RBI makes lenders show the annual percentage rate (APR) in the Key Facts Statement. The APR is a reducing-balance rate, and it also includes the fees. Use our KFS / APR checker to compare offers with their fees.
Flat and reducing rates: frequently asked questions
What is the difference between a flat rate and a reducing rate?
A flat rate charges interest on the full loan for the full tenure. A reducing rate charges interest each month only on the balance that is left. Thus, for the same number, a flat rate costs much more.
How do I convert a flat rate to a reducing rate?
Calculate the flat EMI: (loan + loan × flat rate × years) ÷ months. Then find the reducing rate that gives the same EMI for the same tenure. For usual tenures, the reducing rate is approximately 1.8 times the flat rate: 8% flat is 14.45% for 12 months, 14.55% for 36 months and 14.13% for 60 months.
Which loans use a flat rate?
Dealers of two-wheelers and cars, consumer durable loans and some non-bank lenders frequently give a flat rate. Bank home loans and most bank loans use a reducing rate. Get the method from the lender, and get the APR from the Key Facts Statement.
Is 10% flat the same as 18% reducing?
Approximately. For 24 months, 10% flat is 18.16% reducing. For 36 months it is 17.92%, and for 60 months 17.27%.
Does a lender have to tell me the real rate?
RBI makes lenders give a Key Facts Statement with the annual percentage rate (APR) before you sign. The APR is a reducing-balance rate and includes the fees. Thus, it is the correct number to compare.