Knowledge Base

Flat Rate vs Reducing Balance

Flat: Interest on original principal. Reducing: Interest on outstanding balance

Flat rate of 10% ≈ Reducing rate of 17-18% — flat rate is deceptively expensive.

Banks quote reducing rate (genuine cost). NBFCs/dealers sometimes quote flat rate.

Always ask for reducing balance rate and compare across lenders on the same basis.

RBI mandates disclosure of effective annual rate — check the loan agreement carefully.

Car loans from dealers often use flat rate — convert to reducing rate before comparing.

Pro Tip

Quick conversion: Flat rate × 1.8 ≈ Reducing rate. A "7% flat" car loan is actually ~12.6% reducing.

Flat Rate vs Reducing Balance - Complete Guide

Everything you need to know about Flat Rate vs Reducing Balance and how to optimize your financial strategy.

Understanding the Formula

The core calculation is based on:

Flat: Interest on original principal. Reducing: Interest on outstanding balance

Key Concepts & Rules

Flat rate of 10% ≈ Reducing rate of 17-18% — flat rate is deceptively expensive.

Banks quote reducing rate (genuine cost). NBFCs/dealers sometimes quote flat rate.

Always ask for reducing balance rate and compare across lenders on the same basis.

RBI mandates disclosure of effective annual rate — check the loan agreement carefully.

Car loans from dealers often use flat rate — convert to reducing rate before comparing.

Expert Strategy

Quick conversion: Flat rate × 1.8 ≈ Reducing rate. A "7% flat" car loan is actually ~12.6% reducing.

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