How each is calculated
On a flat rate, interest is charged on the full original amount for the entire tenure, no matter how much you have already repaid. On a reducing balance, interest is charged only on the amount still outstanding, which falls with every instalment. Same headline number, materially different cost.
Why the gap widens with tenure
On a flat structure the outstanding balance is ignored, so the longer the tenure, the more you pay interest on money you have already returned. Over a short tenure the gap is modest. Over several years it is large.
Comparing two offers properly
- Ask explicitly which basis each quoted rate uses
- Convert both to the same basis, or ignore the rates and compare total repayment
- Include processing fees, insurance and any charges loaded into the loan
- Check the prepayment terms: a flat-rate loan may not credit prepayment the way you expect
Where you will meet each
Reducing balance is standard for home loans, loans against property and most bank term lending. Flat quoting turns up more often in some consumer, vehicle and short-tenure financing. Neither is inherently wrong; quoting one as if it were the other is what misleads.
Frequently asked questions
Is a 10% flat rate the same as a 10% reducing rate?
No. For the same loan and tenure, a flat rate costs materially more, because interest keeps accruing on the original amount rather than the falling balance.
How do I convert a flat rate to a reducing one?
There is no single multiplier that holds across tenures. Compute the EMI and total repayment from the flat quote, then find the reducing rate that produces the same total.
Which basis do most lenders use?
Reducing balance is the norm for major retail lending in India. Always confirm on the specific offer rather than assuming.