Interest calculated on full principal for entire tenure.
Reducing Balance Method
Monthly EMI:0
Total Interest:0
Total Payable:0
Interest calculated on outstanding balance only.
Savings with Reducing Rate: 0
Insight: A flat rate of % is mathematically roughly equivalent to a reducing rate of %.
function calculateComparison() {
var P = parseFloat(document.getElementById('principalInput').value);
var R = parseFloat(document.getElementById('rateInput').value);
var T = parseFloat(document.getElementById('tenureInput').value);
if (isNaN(P) || isNaN(R) || isNaN(T) || P <= 0 || R <= 0 || T <= 0) {
alert("Please enter valid positive numbers for all fields.");
return;
}
var months = T * 12;
// — Flat Rate Calculation —
// Formula: Total Interest = P * R * T
var flatTotalInterest = P * (R / 100) * T;
var flatTotalPayable = P + flatTotalInterest;
var flatMonthlyEMI = flatTotalPayable / months;
// — Reducing Rate Calculation —
// Formula: EMI = [P x r x (1+r)^n] / [(1+r)^n-1]
var r_monthly = R / (12 * 100);
var reduceMonthlyEMI = 0;
if (R === 0) {
reduceMonthlyEMI = P / months;
} else {
reduceMonthlyEMI = (P * r_monthly * Math.pow(1 + r_monthly, months)) / (Math.pow(1 + r_monthly, months) – 1);
}
var reduceTotalPayable = reduceMonthlyEMI * months;
var reduceTotalInterest = reduceTotalPayable – P;
// — Effective Interest Rate of Flat Rate (Approximation) —
// Use the NPER function logic inversely to find the rate, or use the approximation rule:
// Approx Effective Rate = (n / (n+1)) * 2 * FlatRate (Rough rule of thumb for comparison)
// A more accurate simplistic view for the user is just showing the cost difference.
// Let's use a simpler approximation for display purposes: Rate * 1.8 (often cited rule of thumb)
// Or better, calculate the IRR based on the Flat EMI.
// Since we can't do full IRR iteration easily in inline JS without a library, we will use the savings comparison.
var approxEffective = (flatMonthlyEMI * months – P) / P * 100 / T * 1.8; // Very rough heuristic
// — Update UI —
document.getElementById('flatEMI').innerText = flatMonthlyEMI.toFixed(2);
document.getElementById('flatInterest').innerText = flatTotalInterest.toFixed(2);
document.getElementById('flatTotal').innerText = flatTotalPayable.toFixed(2);
document.getElementById('reduceEMI').innerText = reduceMonthlyEMI.toFixed(2);
document.getElementById('reduceInterest').innerText = reduceTotalInterest.toFixed(2);
document.getElementById('reduceTotal').innerText = reduceTotalPayable.toFixed(2);
var savings = flatTotalPayable – reduceTotalPayable;
document.getElementById('savingsValue').innerText = savings.toFixed(2);
document.getElementById('displayRate').innerText = R;
// Calculating a cleaner effective rate using (Total Interest / Principal) / Years * 100 * 2 (Rule of 78s logic roughly)
// Actually, let's just show the factor difference
var factor = flatTotalInterest / reduceTotalInterest;
document.getElementById('effectiveRate').innerText = (R * factor).toFixed(2);
document.getElementById('resultDisplay').style.display = 'block';
}
Flat Rate vs Reducing Balance: Understanding the Calculation
When securing financing for vehicles, personal needs, or business equipment, the quoted interest rate percentage is only half the story. The method of calculation—Flat Rate versus Reducing Balance—drastically changes the actual amount of money leaving your pocket. This calculator compares both methods side-by-side using the same principal and percentage to highlight the hidden costs often associated with "Flat Rate" offers.
1. Flat Rate Interest Calculation
In a Flat Rate scheme, the interest is calculated on the original principal amount for the entire duration of the tenure. Even though you are paying back the principal every month, the lender continues to charge interest as if you still owed the full amount.
Total Interest = Principal × (Rate / 100) × Years
EMI = (Principal + Total Interest) / Total Months
Why it is misleading: A 10% flat rate might sound identical to a 10% reducing rate, but because the principal never effectively decreases in the interest calculation, the "Effective Annualized Rate" is typically 1.6 to 1.8 times higher than the quoted figure.
2. Reducing Balance (Diminishing) Rate
The Reducing Balance method (also known as Diminishing method) is the standard for home mortgages and transparent banking loans. Here, interest is calculated only on the outstanding loan balance at the end of each month. As you pay your EMI, the principal reduces, and consequently, the interest portion of your next EMI reduces.
EMI = [P × r × (1 + r)ⁿ] / [(1 + r)ⁿ – 1] Where P is Principal, r is monthly rate, and n is months.
The Benefit: You only pay interest on what you actually owe at any given moment. This results in significantly lower total interest payments over the life of the loan compared to a flat rate of the same percentage.
Comparison Example
If you borrow 100,000 at 10% for 5 years:
Flat Rate: You pay interest on 100,000 every single year. Total Interest = 50,000.
Reducing Rate: You pay interest on 100,000 in month 1, but perhaps only on 80,000 in year 2. Total Interest is approximately 27,482.
Always ask lenders for the Effective Annualized Rate if they quote a Flat Rate, or use this calculator to convert the numbers into real costs.