Flat vs Reducing Rate Calculator India
Compare flat rate and reducing balance interest side by side. Convert a dealer's "7% flat" to its true effective rate (~13% reducing). See which car loan, personal loan, or gold loan offer is genuinely cheaper. Based on RBI guidelines.
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How to Use This Calculator
Flat vs Reducing tab
Enter your loan amount, the flat interest rate quoted by a dealer or NBFC, and the reducing balance rate from a bank. The calculator shows EMI, total interest, and total payment for both methods side by side. It highlights which option costs more and by how much, and shows the effective reducing rate equivalent of the flat rate.
Convert Flat to Effective tab
Enter the loan amount, quoted flat rate, and tenure. The calculator computes the equivalent reducing balance rate using a bisection method. This reveals the true cost of borrowing — a 7% flat rate is typically equivalent to 12-14% on a reducing balance.
Dealer vs Bank tab
Designed for car buyers. Enter the car price, down payment, dealer flat rate, and bank reducing rate. The calculator compares total cost including down payment and shows which option is genuinely cheaper, cutting through the misleading flat rate quote.
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The Formula
Flat rate and reducing balance rate use fundamentally different formulas to calculate EMI:
EMI = (P + P × R × T) / (T × 12)
Where:
P = Loan principal (original amount)
R = Annual flat interest rate (as decimal, e.g. 7% = 0.07)
T = Tenure in years
Interest is charged on the full original principal for the entire tenure.
Reducing Balance EMI:
EMI = P × r × (1 + r)n / ((1 + r)n − 1)
Where:
P = Loan principal
r = Monthly interest rate (annual rate / 12 / 100)
n = Total number of months (years × 12)
Interest is charged on the outstanding (remaining) principal each month.
Flat to Reducing Conversion:
Find the reducing rate Reff such that:
PMT(Reff/12, n, P) = Flat EMI
Solved numerically using bisection method. Rule of thumb: Reff ≈ Flat Rate × 1.8 to 2.0
The key difference is that flat rate charges interest on money you have already repaid. In a reducing balance loan, as you pay EMIs, the principal decreases, so interest also decreases month-on-month. This makes flat rate loans significantly more expensive than they appear.
Example
Rahul — Pune IT professional buying a car worth ₹8,00,000
Rahul wants to buy a Hyundai Creta priced at ₹8,00,000 (on-road). He has ₹2,00,000 for down payment, so he needs a loan of ₹6,00,000 for 5 years. The dealer offers 8% flat rate, while SBI offers 10% reducing balance.
Step 1: Dealer finance (8% flat)
Step 2: Bank loan (10% reducing)
Step 3: The verdict
Despite the dealer quoting "8%" vs the bank's "10%", Rahul saves ₹75,120 by choosing the bank loan. The dealer's 8% flat rate is actually equivalent to ~14.8% on a reducing balance — nearly 50% higher than the bank's 10%.