Flat to Reducing Rate Converter
Convert a flat interest rate to the true reducing-balance rate and back, with EMI
| Flat rate | Reducing rate | EMI | Total interest |
|---|---|---|---|
| 6% | 11.08% | ā¹3,277.78 | ā¹18,000 |
| 8% | 14.55% | ā¹3,444.44 | ā¹24,000 |
| 10% | 17.92% | ā¹3,611.11 | ā¹30,000 |
| 12% | 21.2% | ā¹3,777.78 | ā¹36,000 |
| 14% | 24.4% | ā¹3,944.44 | ā¹42,000 |
| 16% | 27.53% | ā¹4,111.11 | ā¹48,000 |
| 18% | 30.59% | ā¹4,277.78 | ā¹54,000 |
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Results are estimates, not financial advice. Rates, charges and rules change, so confirm with your bank, post office or a financial adviser before you decide. Terms of use
How to Use
- Choose whether the lender quoted a flat rate or a reducing rate. Two-wheeler, consumer-durable and many personal loan offers are flat.
- Enter the loan amount and the rate exactly as quoted.
- Set the tenure in years or months, and the processing fee if there is one.
- The true reducing-balance rate (or the equivalent flat rate), EMI and total interest update as you type.
- Scroll down for the chart of what you actually owe and a table of flat rates and their reducing equivalents for the same tenure.
Flat rate vs reducing rate: why the numbers differ
Lenders in India quote interest in two very different ways. A reducing-balance rate (also called a diminishing rate) charges interest each month only on the principal you still owe. Home loans, most bank personal loans and car loans from banks work this way. A flat rate charges interest on the original loan amount for the entire tenure, even though every EMI repays part of the principal. Flat rates are still common for two-wheeler loans, consumer-durable loans at shops, some personal loans from NBFCs and some gold and microfinance loans.
A flat rate keeps charging interest on money you've already repaid, so it looks much cheaper than it is. A 10% flat rate costs roughly what an 18% reducing rate costs. This flat to reducing rate converter finds the exact equivalent, so you can compare two offers on the same footing.
How the conversion works
Flat EMI = (P + flat interest) Ć· n
Reducing EMI = P Ć r Ć (1 + r)n Ć· [(1 + r)n ā 1]
P is the loan amount, n the number of months and r the monthly reducing rate. The calculator finds the monthly rate r at which the reducing-balance EMI equals the flat-rate EMI. There's no neat formula for this, so it searches for r by repeatedly halving the range (bisection) until the EMIs match to a fraction of a paisa. The yearly rate shown is r Ć 12, the way Indian lenders quote reducing rates. Going the other way, it works out the EMI at the reducing rate and asks what flat rate would give the same EMI.
Worked example
A lender offers ā¹1,00,000 at 10% flat for 3 years.
- Flat interest = 1,00,000 Ć 10% Ć 3 = ā¹30,000
- EMI = (1,00,000 + 30,000) Ć· 36 = ā¹3,611.11
- The reducing rate that gives an EMI of ā¹3,611.11 on ā¹1,00,000 over 36 months is 17.92% a year.
If the same loan were offered at 10% on a reducing balance, the EMI would be ā¹3,226.72 and total interest about ā¹16,162, little more than half the ā¹30,000 charged at 10% flat. If the lender also deducts a 2% processing fee, you receive only ā¹98,000 but still pay ā¹3,611.11 a month, which raises the true annual cost (APR) to about 19.38%.
Flat rates and their reducing equivalents
| Flat rate | Reducing rate (1 year) | Reducing rate (3 years) | Reducing rate (5 years) |
|---|---|---|---|
| 8% | 14.45% | 14.55% | 14.13% |
| 10% | 17.97% | 17.92% | 17.27% |
| 12% | 21.46% | 21.20% | 20.31% |
For short and medium tenures the real rate is close to double. That's the rough rule many people remember: a flat rate is a little under half the real rate.
Tips before you sign
- Ask which kind of rate it is. If the quote says "flat", "add-on" or the interest is calculated upfront on the full amount, it's a flat rate.
- Read the Key Fact Statement (KFS). RBI requires lenders to give borrowers of retail and MSME loans a KFS before the loan is signed. It shows the Annual Percentage Rate (APR), which includes interest and fees. That's the number to compare offers on.
- Count the fees. Processing fees, documentation charges and compulsory insurance all raise the real cost. Use the fee field to see the effect.
- Prepaying a flat-rate loan helps less. The interest was worked out upfront on the full amount, so check how much interest the lender will waive if you close the loan early.