Reducing Rate vs Flat Rate — Personal Loan
Why an 8% flat rate is really about 14% – 15% — convert any flat-rate quote to its reducing-balance equivalent.
Updated 27 September 2026 · 8 lenders trackedWhat you need to know
Banks quote personal loan rates on a reducing balance: each month’s interest is charged only on what you still owe. Some lenders, dealers and loan agents quote a flat rate, charged on the original amount for the whole tenure even as you repay. For the same EMI, a flat rate is equivalent to a reducing rate roughly 1.7 – 1.85 times higher — so always compare the APR in the KFS.
Flat rate → reducing-rate equivalent
| Flat rate quoted | 1 year | 2 years | 3 years | 5 years |
|---|---|---|---|---|
| 7% flat | 12.68% (1.81×) | 12.91% (1.84×) | 12.83% (1.83×) | 12.50% (1.79×) |
| 8% flat | 14.45% (1.81×) | 14.68% (1.83×) | 14.55% (1.82×) | 14.13% (1.77×) |
| 10% flat | 17.97% (1.80×) | 18.16% (1.82×) | 17.92% (1.79×) | 17.27% (1.73×) |
| 12% flat | 21.46% (1.79×) | 21.57% (1.80×) | 21.20% (1.77×) | 20.31% (1.69×) |
Equivalent reducing-balance rate for the same EMI. A flat rate costs roughly 1.7 – 1.85 times its headline number; the gap narrows slightly for longer tenures.
Worked example
| Case | Result |
|---|---|
| Flat 10% on ₹1 lakh for 3 years | Interest ₹30,000; EMI ₹3,611 |
| Same EMI on reducing balance | About 17.9% p.a. |
| Difference | The “10%” loan costs as much as an 18% reducing-rate loan |
How to protect yourself
- Ask “Is this a reducing-balance rate?” for every quote.
- Compare the APR in the Key Facts Statement — it is always on a comparable basis.
- Be wary of low monthly “per cent” quotes (e.g. 1% a month flat is 12% flat, far more on a reducing basis).
Flat vs reducing rate
Frequently asked questions
Do banks charge flat rates on personal loans?
The banks we track quote reducing-balance rates. Flat rates are more common with some NBFCs, consumer-durable finance and informal lenders.
Is a flat rate ever cheaper?
Only if the flat number is less than about half the reducing rate you are comparing it to.
For information and comparison only. Loan terms, rates and rules change — confirm with the lender and read the Key Facts Statement before borrowing.