The two interest-calculation methods
| Reducing balance | Flat rate | |
|---|---|---|
| Interest charged on | Outstanding principal each month | Original principal, for full tenure |
| Monthly interest | Decreases over time | Constant |
| EMI structure | Constant; interest/principal split shifts | Constant; equal split each month |
| Total interest | Lower | Higher (~1.8× at typical tenures) |
| Used in | Home, car, personal, education, business, gold, LAP loans | Credit-card EMI, some NBFC personal loans, microfinance |
Why the gap is so large
In a flat-rate loan, you keep paying interest on the original principal even after you’ve repaid 80% of it. In a reducing-balance loan, by the time you’ve repaid 80% of principal, you’re paying interest only on the remaining 20% — month-by-month interest gets tiny.
The mathematical translation: a flat rate of f% over n months corresponds approximately to a reducing-balance rate of f × 1.8 for retail-loan tenures. This is why a “13% flat-rate credit-card EMI” and a “13% reducing-balance personal loan” are not the same product — the flat is roughly 23% APR.
RBI’s stance
RBI’s Fair Practices Code (revised periodically) requires lenders to:
- Disclose the annualised reducing-balance equivalent rate (APR) alongside any flat-rate quote
- Disclose the all-in cost: interest + processing fee + GST + insurance, broken down
In practice, enforcement varies. Always demand the all-in repayment schedule before signing any flat-rate loan; the headline rate is rarely the right comparison metric.
How to use this calculator
Enter the same loan amount, rate, and tenure in both columns. The calculator runs both methods on the same inputs, so you can see the side-by-side EMI and total cost difference at the rate you’re being quoted.
Quick example — ₹1 lakh at 14% over 24 months:
- Reducing balance EMI: ₹4,802 → total interest ≈ ₹15,250
- Flat rate EMI: ₹5,333 → total interest = ₹28,000
- Difference: ₹12,750 over the loan — for the same headline rate.