Enter the rate to compare how it behaves under both methods.
Calculation Results
Metric
Flat Rate Method
Reducing Balance Method
Monthly EMI
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–
Total Interest Payable
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Total Amount Payable
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Understanding Flat Rate vs. Reducing Balance Rate
When applying for a loan, the interest rate percentage (e.g., 10%) is not the only factor that determines your cost. The method used to calculate that interest is equally critical. Financial institutions typically use one of two methods: Flat Rate or Reducing Balance (Diminishing) Rate.
1. The Flat Interest Rate Method
In a Flat Rate scheme, the interest is calculated on the full principal amount for the entire duration of the loan, regardless of how much you have already repaid. This method usually results in a significantly higher effective interest cost.
Interest = Principal × Rate × Years
EMI = (Principal + Interest) / (Years × 12)
Because the interest charge never decreases—even as your loan balance goes down—the "Effective Annualized Rate" of a flat rate loan is roughly 1.7 to 2 times the quoted nominal rate.
2. The Reducing Balance Method
In the Reducing Balance (or Diminishing Balance) method, interest is calculated only on the outstanding loan amount at the end of each month. As you pay your EMIs and the principal balance decreases, the interest portion of your payment also decreases.
Interest for Month = Outstanding Balance × (Rate / 12)
Principal Repaid = EMI – Interest for Month
This is the standard calculation method for most housing loans and transparent personal loans. It accurately reflects the cost of borrowing money over time.
Key Differences Comparison
Cost: For the same quoted percentage, the Flat Rate method is much more expensive than the Reducing Balance method.
Transparency: Reducing Balance reflects the true cost of funds, whereas Flat Rate often masks a high effective interest rate behind a low nominal number.
Prepayment: Prepaying a Flat Rate loan often yields fewer savings compared to a Reducing Balance loan unless specific clauses are applied.
Use the calculator above to see the mathematical difference. If you are offered a loan at "5% Flat," use this tool to see what the equivalent monthly payment would be if it were calculated properly, or compare it against a "9% Reducing" offer to see which is actually cheaper.
function calculateComparison() {
// 1. Get Input Values
var P = parseFloat(document.getElementById('loanPrincipal').value);
var R = parseFloat(document.getElementById('quotedRate').value);
var T = parseFloat(document.getElementById('loanTenure').value);
// 2. Validation
if (isNaN(P) || isNaN(R) || isNaN(T) || P <= 0 || R < 0 || T <= 0) {
alert("Please enter valid positive numbers for Principal, Rate, and Tenure.");
return;
}
// 3. Flat Rate Calculation logic
// Total Interest = P * (R/100) * T
var flatTotalInterest = P * (R / 100) * T;
var flatTotalPayable = P + flatTotalInterest;
var months = T * 12;
var flatEMI = flatTotalPayable / months;
// 4. Reducing Balance Calculation logic
// EMI = [P x r x (1+r)^n]/[(1+r)^n-1]
var r = R / 12 / 100; // Monthly rate decimal
var n = months; // Total months
var reducingEMI = 0;
var reducingTotalPayable = 0;
var reducingTotalInterest = 0;
if (R === 0) {
reducingEMI = P / n;
reducingTotalPayable = P;
reducingTotalInterest = 0;
} else {
reducingEMI = (P * r * Math.pow(1 + r, n)) / (Math.pow(1 + r, n) – 1);
reducingTotalPayable = reducingEMI * n;
reducingTotalInterest = reducingTotalPayable – P;
}
// 5. Calculate Difference and Effective Rate Estimation
var difference = flatTotalPayable – reducingTotalPayable;
var differencePercent = (difference / reducingTotalPayable) * 100;
// 6. Update HTML Results
document.getElementById('comparisonResult').style.display = 'block';
// Format Currency
var fmt = new Intl.NumberFormat('en-US', { style: 'currency', currency: 'USD' });
document.getElementById('flatEMI').innerHTML = fmt.format(flatEMI);
document.getElementById('flatInterest').innerHTML = fmt.format(flatTotalInterest);
document.getElementById('flatTotal').innerHTML = fmt.format(flatTotalPayable);
document.getElementById('reducingEMI').innerHTML = fmt.format(reducingEMI);
document.getElementById('reducingInterest').innerHTML = fmt.format(reducingTotalInterest);
document.getElementById('reducingTotal').innerHTML = fmt.format(reducingTotalPayable);
// 7. Update Verdict
var verdictHtml = "Analysis: For a loan of " + fmt.format(P) + " over " + T + " years at " + R + "%:";
verdictHtml += "The Flat Rate method costs you an extra " + fmt.format(difference) + " in interest compared to the Reducing Balance method. ";
verdictHtml += "To match the cost of this Flat Rate loan, a Reducing Balance loan would need an interest rate of roughly " + (R * 1.85).toFixed(2) + "% – " + (R * 2.0).toFixed(2) + "%.";
document.getElementById('verdictText').innerHTML = verdictHtml;
}