Basics3 min read · Updated 17 October 2026
Flat rate vs reducing rate: why "10% flat" is not 10%
A flat rate charges interest on the full loan for the whole term. What 10% flat really costs per year, how it compares with a reducing rate, and how to convert them.
The difference
On a flat-rate loan, interest is worked out on the full amount you borrowed for the whole term, even as you repay it. On a reducing-balance loan, each month's interest is charged only on the balance that is left. Because you owe less each month, a reducing rate of 10% costs much less than a flat 10%.
Worked example
₹10 lakh for 5 years at 10% flat: interest is ₹10 lakh × 10% × 5 = ₹5 lakh. Total repaid is ₹15 lakh over 60 months, so the EMI is ₹25,000. If you solve for the reducing rate that gives the same EMI, it is about 17.3% a year. That is nearly double the 10% on the label. Try it with the flat vs reducing rate calculator.
Where you meet it
Flat rates are common in some personal, vehicle and consumer loans, and in quick offers. Home loans from banks and housing finance companies are normally quoted as reducing-balance rates. Always ask: "Is this rate on the reducing balance?"
How to compare offers
- Ask for the EMI, the tenure and the total amount you will pay.
- Use the true loan cost calculator to turn fees and the EMI into one yearly rate.
- Read the APR in your Key Fact Statement. See what a KFS is.
Common questions
What is a flat interest rate?
A rate charged on the original loan amount for the whole term, regardless of how much you have repaid.
Is flat rate or reducing rate better?
For the same number, reducing is much cheaper. A 10% reducing rate costs far less than 10% flat.
How do I convert a flat rate to a reducing rate?
Use the EMI and tenure to find the rate that repays the loan. Our flat vs reducing calculator does this.