Flat vs Reducing Interest Rate Calculator

Loan Amount
10 Lakh 
₹
Rate of Interest (p.a)
%
Loan Tenure
Years
Flat Interest Rate Reducing Balance Interest Rate
Monthly EMI: ₹0 ₹0
Principal Amount: ₹0 ₹0
Total Interest: ₹0 ₹0
Total Amount Payable: ₹0 ₹0
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Flat vs Reducing Interest Rate Calculator

When you decide to take a loan, one of the most important factors to consider is how the interest is calculated. The two most common methods of calculating loan interest are Flat Interest Rate and Reducing Balance Interest Rate. Each method has its own impact on the total amount you’ll pay over the course of the loan. In this article, we’ll explore these two interest rate types, explain how they work, and help you understand the difference by using an example.

What is the Flat Interest Rate?

The Flat Interest Rate method involves calculating interest on the full loan amount for the entire duration of the loan. The interest remains fixed throughout the loan tenure, regardless of the amount you've already paid back. This means that your EMI amount is consistent for the entire loan period, and the total interest paid tends to be higher compared to reducing balance methods. The lender determines the repayment schedule upfront, making it easier for borrowers to plan their finances as the total liability is set from the start.

What is the Reducing Balance Interest Rate?

In the Reducing Balance Interest Rate method, interest is charged based on the outstanding loan balance. As you make payments, the loan principal decreases, and the interest for subsequent periods is calculated on the remaining principal. This means that over time, as the principal decreases, the interest component of the EMI also reduces, resulting in lower interest costs and smaller EMIs as the loan progresses. It’s a more cost-effective option in the long run because the interest is recalculated regularly based on the remaining loan balance.

Comparing the Two Methods with an Example

To make it clearer, let’s take a look at the loan example with specific numbers.

Loan Details:

  • Loan Amount: ₹10,00,000
  • Rate of Interest (p.a.): 12%
  • Loan Tenure: 5 Years (60 months)

Comparison Table:

Loan Details Flat Interest Rate Reducing Balance Interest Rate
Loan Amount ₹10,00,000 ₹10,00,000
Rate of Interest (p.a.) 12% 12%
Loan Tenure 5 Years 5 Years
Monthly EMI ₹26,667 ₹22,244
Total Interest ₹6,00,000 ₹3,34,667
Total Amount Payable ₹16,00,000 ₹13,34,667

Which Method is Beneficial?

Based on the results in the table, the Reducing Balance Interest Rate method is clearly the more beneficial option:

  • Monthly EMI: With the reducing balance method, the EMI is ₹22,244, which is lower than ₹26,667 under the flat interest method. This provides immediate savings on monthly payments.
  • Total Interest: The reducing balance method leads to a total interest of ₹3,34,667, while the flat interest method costs ₹6,00,000 in total interest. This results in savings of ₹2,65,333 in interest payments.
  • Total Amount Payable: The total amount payable is ₹13,34,667 with the reducing balance method, compared to ₹16,00,000 with the flat interest method. This represents a significant saving of ₹2,65,333 over the course of the loan.

Difference Between Flat and Reducing Balance Methods

The primary difference between the two methods lies in how interest is calculated and how it impacts the total cost of the loan:

  • Flat Interest Rate Method:
    • Interest Calculation: Interest is calculated on the full loan amount, regardless of the outstanding balance. This results in a higher total interest burden over the loan tenure.
    • EMI: Fixed monthly EMI throughout the loan tenure, which makes it easier to budget but results in higher monthly payments compared to the reducing balance method.
    • Total Interest: Higher overall interest payments since the interest is based on the full loan amount from the start.
    • Total Amount Payable: The total amount paid is higher as it includes both the principal and higher interest payments.
  • Reducing Balance Interest Rate Method:
    • Interest Calculation: Interest is recalculated based on the remaining loan balance, which reduces over time as repayments are made. This leads to a reduction in the interest component of the EMI.
    • EMI: Monthly payments start lower compared to the flat rate method and reduce over time, making it more flexible.
    • Total Interest: Lower total interest payments because interest is calculated only on the remaining principal, reducing the total cost of the loan.
    • Total Amount Payable: The overall repayment is much lower, which means you save money in interest.

Overall, the Reducing Balance Interest Rate method is more cost-effective because it results in lower monthly payments and reduces the total interest paid over the life of the loan. It’s a better option for borrowers who are focused on minimizing their repayment amount.

FAQs

The calculator compares two types of interest rate methods—Flat Interest Rate and Reducing Balance Interest Rate. By entering your loan amount, interest rate, and tenure, the tool calculates the monthly EMI, total interest, and the total payable amount for both methods. This helps you understand the difference in total repayment cost and make an informed decision.
Yes, the calculator shows you the total interest savings when using the Reducing Balance Interest Rate compared to the Flat Interest Rate method. It provides a breakdown of the savings in both monthly EMIs and total interest paid.
The interest rate directly impacts your monthly EMI. A higher interest rate increases the EMI, while a lower interest rate reduces the EMI. The interest rate determines how much interest you’ll pay on the loan amount, and a higher rate means you will pay more over the loan tenure.
A fixed-rate loan has a constant interest rate throughout the loan tenure, while a floating-rate loan's interest rate may change over time based on market conditions. Fixed-rate loans offer stability, while floating-rate loans can be more cost-effective if interest rates decrease.
It is possible to get a personal loan with a low credit score, but the terms and conditions might not be favorable. Lenders may charge a higher interest rate or offer a lower loan amount. You may also be required to provide collateral or a co-signer.
Choosing a shorter loan tenure results in higher monthly EMIs but allows you to pay off the loan faster and save on interest. A longer loan tenure results in lower EMIs but increases the total interest paid over time. It depends on your financial situation and how much you can afford as monthly payments.
Prepaying or foreclosing your loan can help reduce the overall interest paid since the loan principal is reduced earlier. This leads to lower interest costs and helps you pay off your debt faster. However, check with your lender for any prepayment penalties or charges.
To improve your chances of getting approved for a personal loan, maintain a good credit score, have a stable income, and keep your debt-to-income ratio low. Lenders are more likely to approve loans for borrowers with a strong credit history and financial stability.