Flat vs Reducing Balance EMI Calculator
Enter a loan and see both methods side by side — including what a “flat” quote actually costs when expressed as a reducing-balance rate.
- Total interest
- ₹12,000
- Total repayable
- ₹1,12,000
- Total interest
- ₹6,619
- Total repayable
- ₹1,06,619
A 12% flat loan over 12 months costs the borrower the same as 21.46% reducing balance — ₹5,381 more interest than a 12% reducing-balance loan of the same size.
How each method works
Under flat rate, interest is calculated once on the original principal and spread evenly across the tenure. The borrower keeps paying interest on money they have already repaid, so the cost does not fall as the loan runs down.
Under reducing balance, interest is recalculated on the outstanding principal each period. Early instalments are mostly interest, later ones mostly principal, and the total interest is materially lower for the same quoted rate.
Indian lenders use both. What the RBI expects is that the borrower is shown the effective annualised rate — the figure that appears on the Key Facts Statement — rather than only the headline flat number.
Frequently asked
What is the difference between flat and reducing balance interest?
Flat interest is charged on the full original principal for the whole tenure, however much you have already repaid. Reducing balance charges interest only on the outstanding amount, which falls with every EMI. For the same quoted rate, flat interest costs roughly twice as much.
Why is 12% flat not the same as 12% reducing?
Under flat, you keep paying interest on money you have already returned. A 12% flat loan over 12 months works out to roughly 21–22% on a reducing basis. The effective rate shown above is the honest comparison.
Which method should a lender use?
Both are legal in India and both are used. Flat is common in microfinance and daily-collection lending because the instalment is a round number and easy to explain in the field; reducing is standard for NBFC and bank term loans. What matters for compliance is that the borrower is told the effective rate, which is required on the Key Facts Statement.
How is the EMI calculated on reducing balance?
EMI = P × r × (1+r)^n / ((1+r)^n − 1), where P is principal, r is the monthly rate (annual ÷ 12 ÷ 100) and n is the number of instalments.