Flat vs reducing interest rate: which costs more?
A “12% flat” loan and a “12% reducing” loan are not the same price — the flat one can cost almost twice as much interest. Here is the difference, and a converter that shows the true rate behind a flat quote.
Two ways to charge interest
- Reducing balance — interest each month is charged only on what you still owe. As you repay, the interest part of each EMI falls. Personal loans from banks and NBFCs are normally quoted this way.
- Flat rate — interest is charged on the full original amount for the whole tenure, even though you repay part of it every month. The quoted number looks lower than the real cost.
Convert a flat rate to its real rate
EMI at 12% flat: ₹5,167 · total interest ₹24,000
The same EMI on a reducing balance means a rate of about 21.6% a year.
Example figures. Ignores fees; the APR in the lender’s Key Fact Statement includes them.
How to compare quotes
- Ask whether a rate is flat or reducing. If an agent or app will not say, treat that as a warning sign.
- Compare the APR and the total amount repayable in each Key Fact Statement, for the same amount and tenure, and check the fees and prepayment terms too.
- Each lender’s Key Fact Statement states its rate, how interest is charged and the APR. The rate ranges lenders list: personal loan interest rates.
Why fees push the APR above the rate: APR and the Key Fact Statement.
Applications are made in the Innopay app: choose the amount you need there and see the offers available to you. The lender decides approval.
Apply in the Innopay appFrequently asked questions
Is a flat rate cheaper than a reducing rate?
No. At the same quoted number, a flat rate costs much more, because interest is charged on the full amount for the whole tenure. 12% flat over two years is about 21.6% on a reducing balance.
How should I compare two loan offers?
Use the APR and the total amount repayable in each lender's Key Fact Statement. They are calculated the same way for every lender.