function calculateRates() {
// 1. Get input values
var principal = parseFloat(document.getElementById('principal').value);
var flatRate = parseFloat(document.getElementById('flatRate').value);
var years = parseFloat(document.getElementById('duration').value);
// Validate inputs
if (isNaN(principal) || isNaN(flatRate) || isNaN(years) || principal <= 0 || years <= 0) {
alert("Please enter valid positive numbers for all fields.");
return;
}
// 2. Calculate Flat Rate Metrics
// Formula: Interest = Principal * (Rate/100) * Years
var totalInterestFlat = principal * (flatRate / 100) * years;
var totalAmount = principal + totalInterestFlat;
var months = Math.round(years * 12);
var emi = totalAmount / months;
// 3. Calculate Effective Interest Rate (Iterative Method / Binary Search)
// We know P, N (months), and EMI. We need to find r (monthly rate)
// Equation: P = (EMI / r) * (1 – (1 + r)^(-N))
var effectiveAnnualRate = 0;
if (flatRate === 0) {
effectiveAnnualRate = 0;
} else {
var low = 0;
var high = 1.0; // 100% monthly interest cap
var tolerance = 1e-7;
var monthlyRateFound = 0;
// Max 100 iterations for precision
for (var i = 0; i < 100; i++) {
var mid = (low + high) / 2;
if (mid === 0) { low = 0.000001; continue; }
// Calculate Principal based on guessed rate 'mid'
// PV = PMT * (1 – (1+r)^-n) / r
var factor = (1 – Math.pow(1 + mid, -months)) / mid;
var calculatedPrincipal = emi * factor;
if (Math.abs(calculatedPrincipal – principal) principal) {
// If calc PV is high, it means our discount rate (mid) is too low
low = mid;
} else {
high = mid;
}
monthlyRateFound = mid;
}
effectiveAnnualRate = monthlyRateFound * 12 * 100;
}
// 4. Update UI
document.getElementById('resEffectiveRate').innerText = effectiveAnnualRate.toFixed(2) + "%";
document.getElementById('resEMI').innerText = emi.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('resTotalInterest').innerText = totalInterestFlat.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('resTotalAmount').innerText = totalAmount.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
// Comparison Message
var diff = effectiveAnnualRate – flatRate;
document.getElementById('comparisonMsg').innerText = "The effective rate is " + diff.toFixed(2) + "% higher than the flat rate.";
document.getElementById('results').style.display = "block";
}
Understanding Flat Rate vs. Effective Rate
When financing a purchase or taking out a personal loan, the interest rate quoted by the lender is one of the most critical factors. However, not all interest rates are calculated equally. The difference between a "Flat Rate" and an "Effective Rate" (often called Reducing Balance Rate) can be substantial, often masking the true cost of borrowing.
What is a Flat Interest Rate?
A Flat Interest Rate is calculated on the original principal amount for the entire duration of the loan. It does not account for the fact that you are paying back the principal over time. Because the interest calculation assumes you owe the full amount until the very last day, the total interest payable is significantly higher than it appears.
Total Interest = Principal × (Flat Rate ÷ 100) × Years
This method is commonly used in car loans and personal loans to make the interest rate look attractively low (e.g., "Only 3% per year!").
What is an Effective Interest Rate?
The Effective Interest Rate (or Reducing Balance Rate) is calculated only on the outstanding balance of the loan. As you make monthly payments, your principal balance decreases. Therefore, the interest charged each month should also decrease.
This is the standard calculation method for mortgages and credit cards. It represents the true economic cost of the loan. When a flat rate is converted to an effective rate, the effective rate is typically 1.8 to 2 times higher than the flat rate.
Why the Difference Matters
Imagine borrowing 10,000 at 5% for 3 years.
Flat Rate Method (5%): You pay interest on the full 10,000 for all 3 years. Total interest is 1,500.
Reducing Balance Method (5%): You pay interest only on what you still owe. Since the balance drops every month, the total interest would be much lower (approx. 790).
If a lender charges you 1,500 interest on a 10,000 loan over 3 years, the Effective Rate is actually around 9.4%, not 5%. This calculator performs the complex iterative math required to reveal that true percentage.
How to Use This Calculator
Principal Amount: Enter the total amount of money you are borrowing.
Quoted Flat Rate: Enter the interest rate percentage advertised by the lender.
Duration: Enter the number of years you will be paying off the debt.
The result will show you the "True APR" or Effective Rate, allowing you to compare this loan accurately against other financial products that use standard reducing balance rates.