About the Flat vs Reducing Rate Calculator
This flat vs reducing rate calculator shows what a “flat” interest rate really costs. With a flat rate, interest is charged on the original loan amount for the whole term, even though you repay part of the principal every month. With a reducing (or diminishing) balance rate, interest is charged only on what you still owe. A flat rate therefore looks much cheaper than it is — often close to half the true rate.
Enter the loan amount, the flat rate you were quoted and the term. The calculator gives the monthly installment and total interest under the flat method, finds the equivalent reducing-balance rate that produces the same installment, and shows what you would pay if the same headline rate were applied on a reducing basis.
Flat rates are widely used for car loans, consumer durables, microfinance and personal loans in India, Southeast Asia, the Middle East and Africa. Always compare offers using the reducing-balance equivalent, which is the rate comparable to an APR.
With the default inputs, the equivalent reducing-balance rate is 14.55%. Change any value above to recalculate instantly.
How to use the flat vs reducing rate calculator
- 1Enter the loan amount.
- 2Enter the flat interest rate the lender quoted.
- 3Enter the loan term in years.
- 4Read the equivalent reducing-balance rate and compare it with other offers’ APRs.
- 5Check the extra interest the flat method costs versus a reducing-balance loan.
Formula and method
Under a flat rate f, total interest is the principal P × f × the term t in years, and the installment is simply (principal + interest) ÷ the number of months n. Because interest never falls as you repay, the true cost is higher than the quoted rate.
The equivalent reducing-balance rate R is the annual rate at which a standard amortizing loan of P with n monthly payments has exactly the same installment. It is found numerically (there is no closed form) and is the rate you should compare with APRs. A common shortcut is R ≈ 2n ÷ (n + 1) × f; it ignores compounding within the term and overstates R, especially at higher rates and longer terms, so the exact figure here is lower.
- P
- Loan amount
- f
- Flat interest rate per year
- t
- Term in years
- n
- Number of monthly installments (t × 12)
- R
- Equivalent reducing-balance annual rate
Worked examples
100,000 at 8% flat for 3 years
Flat interest is 100,000 × 8% × 3 = 24,000, so each of the 36 installments is 124,000 ÷ 36 = 3,444.44. A standard reducing-balance loan with that installment has a rate of about 14.55%, so the “8%” loan really costs almost twice the headline rate.
50,000 at 10% flat for 5 years
Interest of 25,000 is added up front and repaid with the 50,000 principal over 60 months at 75,000 ÷ 60 = 1,250 each. The equivalent reducing rate is about 17.27%.
Short 1-year loan at 12% flat
Total flat interest is 2,400 over 12 months, but the true reducing-balance rate is about 21.46%. At a genuine 12% reducing rate the interest would be only about 1,324.
Frequently asked questions
What is a flat interest rate?+
A flat rate charges interest on the full original loan amount for the entire term, regardless of how much you have repaid. Total interest is principal × rate × years, and it is split evenly across the installments.
What is a reducing balance interest rate?+
A reducing (diminishing) balance rate charges interest each month only on the outstanding principal. As you repay, interest falls. Most mortgages, bank personal loans and credit cards use reducing-balance interest.
How do I convert a flat rate to a reducing rate?+
Find the rate at which a normal amortizing loan gives the same installment. A rough rule is reducing rate ≈ flat rate × 2n ÷ (n + 1), but it overstates the true figure. Solved exactly, the reducing rate is typically about 1.7 to 1.85 times the flat rate — lower for higher rates and longer terms. This calculator solves it exactly.
Is a flat rate always more expensive?+
At the same headline number, yes — a flat rate always costs more than a reducing rate for any loan repaid in installments. A flat-rate offer is only cheaper if its reducing-balance equivalent is lower than the competing loan’s rate.
Is the equivalent reducing rate the same as APR?+
It is the same concept as APR when there are no fees. If the lender also charges processing or documentation fees, the true APR is higher still — use the APR calculator to include them.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.