Flat Rate ↔ Reducing Balance Rate Converter
Convert a flat interest rate to its true reducing balance equivalent — and instantly see how much a lender’s “attractive flat rate” really costs you.
Flat Rate vs Reducing Balance — The Hidden Trap
A “10% flat rate” loan is NOT 10% interest. Under the flat rate method, interest is calculated on the entire original loan amount throughout the tenure — even though you’re repaying principal each month. A 10% flat rate is equivalent to approximately 18–20% effective rate (reducing balance), which is how banks and RBI measure true loan cost (the Annual Percentage Rate, APR).
Personal finance rule: always convert flat rates to reducing rates before comparing loans. Car dealers and some NBFCs quote flat rates to make loans appear cheaper than they are. Regulated banks must disclose the APR, but many informal lenders still use flat rates.
EMI (flat) = (P + P×r_flat×n) / (n×12)
Converting to Reducing Rate (r_eff): solve numerically so that
EMI(flat) = P × r_eff/12 × (1+r_eff/12)^(12n) / ((1+r_eff/12)^(12n) – 1)
Rule of Thumb: r_eff ≈ r_flat × 1.83 (for 3-year tenures)
Flat EMI = (6,00,000 + 6,00,000×0.09×5) / 60 = ₹14,500/month
Actual reducing rate ≈ 16.4% — not 9%!
Total extra cost vs a 16.4% reducing rate loan = ₹0 (they’re equivalent). But vs a true 9% reducing rate loan, you overpay ₹1.2L in interest.
💡 What This Means for You
Before taking any personal loan, car loan, or consumer finance deal, use this converter to find the true reducing rate. Always compare loans on their reducing balance rate — this is the legally mandated disclosure for all regulated banks in India (per RBI guidelines).
Calculate your actual EMI and total loan cost
Use our Personal Loan EMI Calculator for full amortisation breakdown.