EMI Calculations and Checklists
Flat rate vs reducing balance: why a '10% flat' personal loan costs about 18%
How flat-rate quotes work on Indian consumer and personal loans, how to convert a flat rate to a reducing-balance rate, and worked examples with the arithmetic shown.
A flat rate charges interest on the original loan amount for the whole tenure, even though you repay part of the principal with every EMI. A reducing-balance rate charges interest only on what you still owe. That makes a flat rate look much cheaper than it is: over a typical 1 to 5 year tenure, a flat rate is roughly equal to 1.7 to 1.9 times the same number as a reducing rate. An illustrative ₹3 lakh at 10% flat for 3 years costs ₹90,000 of interest, the same as about 17.9% reducing, while 10% reducing would cost about ₹48,500. Banks and NBFCs quote personal loans on a reducing basis, and the APR in the Key Fact Statement shows the true annual cost, but flat quotes still appear from dealers, agents and some informal lenders.
This guide belongs to the personal loan EMI calculation guide.
The two methods side by side
Illustrative ₹3,00,000 for 36 months:
| Method | Interest calculation | EMI | Total interest |
|---|---|---|---|
| 10% flat | 3,00,000 × 10% × 3 = ₹90,000 | (3,00,000 + 90,000) ÷ 36 ≈ ₹10,833 | ₹90,000 |
| 10% reducing balance | Monthly on the outstanding balance | about ₹9,680 | about ₹48,500 |
| 17.9% reducing balance | Monthly on the outstanding balance | about ₹10,833 | about ₹90,000 |
The flat loan and the 17.9% reducing loan have the same EMI and the same total interest. They are the same loan described in two ways.
Why the difference is so large
In month 1, both loans owe interest on ₹3 lakh. By month 18 you have repaid about half the principal on a reducing loan, so interest falls by about half. On a flat loan interest stays at ₹2,500 a month (₹90,000 ÷ 36) throughout. On average you have borrowed only a little more than half the original amount, yet paid interest on all of it.
Converting flat to reducing: two ways
Quick rule of thumb. Reducing rate ≈ flat rate × 2n ÷ (n + 1), where n is the number of EMIs. For 36 EMIs: 10 × 72 ÷ 37 ≈ 19.5%. This overstates slightly; use it only to spot a bad deal.
Exact method. Work out the flat EMI, then find the reducing rate that gives the same EMI over the same months. In a spreadsheet: =RATE(36, -10833, 300000) × 12 gives about 17.9%. Or enter the loan amount and tenure in the EMI calculator and adjust the rate until the EMI matches the flat EMI.
Equivalent reducing rates (illustrative, 3-year loans)
| Flat rate quoted | Flat EMI on ₹3 lakh | Equivalent reducing rate |
|---|---|---|
| 8% | ₹10,333 | about 14.6% |
| 10% | ₹10,833 | about 17.9% |
| 12% | ₹11,333 | about 21.2% |
| 14% | ₹11,833 | about 24.4% |
The tenure effect
For a 10% flat rate, the equivalent reducing rate is about 18.0% over 1 year, 18.2% over 2 years, 17.9% over 3 years and 17.3% over 5 years. It stays close to 1.7–1.9 times the flat figure throughout, which is why the warning holds for any typical personal loan tenure.
Where flat quotes still appear
- Consumer durable and gadget finance at a store or through a dealer, where the advertised figure is a monthly or flat rate.
- "Per month" quotes from agents or apps, such as "1.25% a month". Clarify whether that is 1.25% on the original amount (flat) or on the balance (reducing, about 15% a year).
- Informal lenders who charge a fixed sum of interest per month on the original loan.
- Two-wheeler and used-vehicle loans from some dealers.
A regulated bank or NBFC loan must come with a Key Fact Statement that shows the APR, so the true cost is visible. Ask for the KFS before comparing; see the KFS and APR guide.
"No-cost EMI" is a related trap
A "no-cost" or "zero-interest" EMI on a purchase usually means the interest is covered by a discount the seller gives up, or by a processing fee. Check:
- Did you lose a cash discount you would otherwise get?
- Is there a processing fee, and GST on it?
- Is GST charged on the interest component that is then refunded as a discount?
- Does the card or loan EMI block your credit limit?
If the total you pay exceeds the cash price, it is not free credit.
Decision checklist
- Ask whether a quoted rate is flat or reducing, and get the answer in writing.
- Convert any flat or monthly quote into an annual reducing rate before comparing.
- Compare on the APR in the KFS, not on the quoted rate.
- Check the fee and its GST separately.
- Prefer lenders that give a full repayment schedule showing interest and principal for each EMI.
To weigh several offers once they are all on a reducing basis, use the offer comparison worked example and the tenure guide.
Frequently asked questions
Is a flat rate ever cheaper?
Not for the same number. A 10% flat rate always costs more than 10% reducing over any tenure longer than one month. A flat rate can only be cheaper than a much higher reducing rate.
My agreement shows a reducing rate but the agent quoted flat. Which counts?
The agreement and KFS count. If they differ from what you were told, ask for a corrected KFS before signing.
How do I convert "1.5% a month" into an annual rate?
If it is on the reducing balance, 1.5% × 12 = 18% a year (nominal). If it is 1.5% a month on the original amount, it is a flat rate of 18% a year, roughly 30.6% reducing over 3 years.
Does prepaying a flat-rate loan save interest?
It depends on the agreement. Some flat-rate contracts calculate the payoff in a way that leaves little saving; ask for a foreclosure statement before deciding.
Sources
- Reserve Bank of India — KFS and APR disclosure requirements, Fair Practices Code
- RBI Kehta Hai — RBI consumer awareness material
- National Consumer Helpline — complaints about misleading retail finance offers
