Understanding Flat vs Reducing Rate
Lenders sometimes advertise low flat rates to make loans seem affordable. However, flat rate interest is calculated on the full principal throughout the loan, making it significantly more expensive than it appears.
How They Calculate Interest
| Method | Calculation |
|---|---|
| Flat Rate | Interest = Principal × Rate × Tenure (years) |
| Reducing Balance | Interest = Outstanding Balance × Rate / 12 (monthly) |
Example Comparison
For ₹5 lakh loan for 3 years:
| Metric | 10% Flat | 10% Reducing |
|---|---|---|
| Total Interest | ₹1,50,000 | ₹80,437 |
| EMI | ₹18,056 | ₹16,123 |
| Total Payment | ₹6,50,000 | ₹5,80,437 |
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Always Ask
When comparing loan offers, always ask for the reducing balance rate or the APR (Annual Percentage Rate). Don't be misled by low flat rates.