What is the difference between a flat rate and a reducing balance rate?

Lesson 23 of 28 · The flat-rate loan trick · 3 min read · Reviewed 15 Oct 2026

Quick answer

A flat rate charges interest on the full loan for the whole term, even as you repay it. A 10% flat rate for 3 years costs the same as about 17.9% on a reducing balance. Compare loans only on the reducing balance rate, which lenders must state.

With a reducing balance, interest is charged only on what you still owe. Each EMI lowers the balance, so later EMIs carry less interest.

A flat rate keeps charging interest on the original amount. It looks cheaper on a poster and costs almost twice as much.

Key idea: Ask for the annual percentage rate (APR) or the reducing balance rate, and add processing fees.

Try the calculator and the one-question quiz on this page to check your own numbers.

Common questions

Where do flat rates show up?

Some personal, consumer durable, two-wheeler and car loans, and some no-cost EMI offers.

What is a no-cost EMI?

The interest is usually given back as a discount, but the processing fee and GST on interest can still cost you. Check the total you pay.

What does the lender have to tell me?

RBI requires lenders to give a Key Fact Statement with the annual percentage rate before you sign.

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