EMI calculator

Flat vs Reducing Rate Calculator

Loan Amount (₹)

Interest Rate (%)

Loan Tenure (Years)

Flat Rate

EMI: ₹0

Principal: ₹0

Total Payment: ₹0

Reducing Rate

EMI: ₹0

Principal: ₹0

Total Payment: ₹0

Understanding Flat Rate vs. Reducing Rate: A Simple Guide

When you take a loan, the interest you pay can be calculated in two common ways: Flat Rate and Reducing Rate. These methods affect how much interest you’ll pay over the loan period and your monthly payments (EMI). Let’s break them down step by step.

What is a Flat Rate?

A Flat Rate is a straightforward method where the interest is calculated on the entire loan amount for the entire loan period, regardless of how much you’ve already paid back.

• How It Works: The interest is fixed based on the original loan amount (principal) and doesn’t decrease as you repay the loan.
• Formula for Flat Rate Interest:
  $$\mathrm{Flat\; Rate\; Interest}=\frac{\mathrm{Principal}\times \mathrm{Rate}\times \mathrm{Tenure}}{100}$$
  • Principal: The loan amount you borrow.
  • Rate: The annual interest rate (in percentage).
  • Tenure: The loan duration in years.
• Total Amount to Pay:
  $$\mathrm{Total\; Amount}=\mathrm{Principal}+\mathrm{Flat\; Rate\; Interest}$$
• Monthly EMI (Equated Monthly Installment):
  $$\mathrm{EMI}=\frac{\mathrm{Total\; Amount}}{\mathrm{Tenure\; in\; Months}}$$ (Tenure in Months = Tenure in Years × 12)

What is a Reducing Rate?

A Reducing Rate (or Reducing Balance Rate) is a method where the interest is calculated on the remaining loan balance each month, which decreases as you make payments.

• How It Works: As you repay the loan, the outstanding principal reduces, and the interest is calculated only on the remaining amount. This means you pay less interest over time compared to a flat rate.
• Formula for Reducing Rate EMI:
  $$\mathrm{EMI}=\mathrm{Principal}\times \frac{\mathrm{Monthly\; Rate}\times {(1+\mathrm{Monthly\; Rate})}^{\mathrm{Tenure\; in\; Months}}}{{(1+\mathrm{Monthly\; Rate})}^{\mathrm{Tenure\; in\; Months}}-1}$$
  • Monthly Rate: Annual Rate ÷ (12 × 100) (convert to decimal for monthly use).
  • Tenure in Months: Tenure in Years × 12.
• Total Amount to Pay:
  $$\mathrm{Total\; Amount}=\mathrm{EMI}\times \mathrm{Tenure\; in\; Months}$$
• Total Interest Paid:
  $$\mathrm{Reducing\; Rate\; Interest}=\mathrm{Total\; Amount}-\mathrm{Principal}$$

Key Difference Between Flat Rate and Reducing Rate

• Flat Rate: Interest is calculated on the full loan amount for the entire period, so you pay more interest overall.
• Reducing Rate: Interest is calculated on the remaining balance, which decreases with each payment, so you pay less interest overall.

Example: Flat Rate vs. Reducing Rate

Let’s say you borrow ₹1,00,000 at an interest rate of 10% per year for 3 years (36 months). Let’s calculate the interest and EMI for both methods.

Flat Rate Calculation

1. Flat Rate Interest:
   $$\mathrm{Flat\; Rate\; Interest}=\frac{\mathrm{Principal}\times \mathrm{Rate}\times \mathrm{Tenure}}{100}$$ $$\mathrm{Flat\; Rate\; Interest}=\frac{\mathrm{1,00,000}\times 10\times 3}{100}=\mathrm{₹30,000}$$
2. Total Amount to Pay:
   $$\mathrm{Total\; Amount}=\mathrm{Principal}+\mathrm{Flat\; Rate\; Interest}=\mathrm{1,00,000}+\mathrm{30,000}=\mathrm{₹1,30,000}$$
3. Monthly EMI:
   $$\mathrm{EMI}=\frac{\mathrm{Total\; Amount}}{\mathrm{Tenure\; in\; Months}}=\frac{\mathrm{1,30,000}}{36}\approx \mathrm{₹3,611.11}$$

Summary for Flat Rate:
- Principal: ₹1,00,000
- Interest: ₹30,000
- Total Payment: ₹1,30,000
- EMI: ₹3,611.11

Reducing Rate Calculation

1. Monthly Rate:
   $$\mathrm{Monthly\; Rate}=\frac{\mathrm{Annual\; Rate}}{12\times 100}=\frac{10}{1200}=0.008333$$
2. EMI Calculation:
   $$\mathrm{EMI}=\mathrm{1,00,000}\times \frac{0.008333\times {(1+0.008333)}^{36}}{{(1+0.008333)}^{36}-1}$$ - First, calculate (1 + 0.008333)^36 ≈ 1.34885
   - So, the EMI becomes:
   $$\mathrm{EMI}=\mathrm{1,00,000}\times \frac{0.008333\times 1.34885}{1.34885-1}$$ $$\mathrm{EMI}=\mathrm{1,00,000}\times \frac{0.01124}{0.34885}\approx \mathrm{1,00,000}\times 0.03223\approx \mathrm{₹3,223}$$
3. Total Amount to Pay:
   $$\mathrm{Total\; Amount}=\mathrm{EMI}\times \mathrm{Tenure\; in\; Months}=\mathrm{3,223}\times 36\approx \mathrm{₹1,16,028}$$
4. Reducing Rate Interest:
   $$\mathrm{Reducing\; Rate\; Interest}=\mathrm{Total\; Amount}-\mathrm{Principal}=\mathrm{1,16,028}-\mathrm{1,00,000}=\mathrm{₹16,028}$$

Summary for Reducing Rate:
- Principal: ₹1,00,000
- Interest: ₹16,028
- Total Payment: ₹1,16,028
- EMI: ₹3,223

Comparison of Flat Rate vs. Reducing Rate

Parameter	Flat Rate	Reducing Rate
Principal	₹1,00,000	₹1,00,000
Interest Rate	10%	10%
Tenure	3 years	3 years
Total Interest Paid	₹30,000	₹16,028
Total Amount to Pay	₹1,30,000	₹1,16,028
Monthly EMI	₹3,611.11	₹3,223

Which One Should You Choose?

• Flat Rate: Looks simpler because the interest rate seems lower, but you end up paying more interest overall (₹30,000 in the example).
• Reducing Rate: More cost-effective because you pay interest only on the remaining balance, saving you money (₹16,028 in the example).

Most banks and financial institutions use the Reducing Rate method for loans like home loans, personal loans, or car loans because it’s fairer to borrowers. However, some short-term loans or informal lenders might use a Flat Rate, so always check the method before signing up for a loan!

Why This Matters

Understanding the difference between Flat Rate and Reducing Rate helps you make smarter financial decisions. In the example above, choosing a reducing rate saves you ₹13,972 (₹30,000 - ₹16,028) in interest over 3 years. That’s a significant amount!