Flat rate to reducing balance converter
A flat rate and a reducing rate with the same number on them are not the same price. Enter the rate you were quoted and see it on the other basis, for your tenure.
Computed from the inputs
10.00% flat, over 3 years, costs the same as
17.92%
reducing balance
- Monthly instalment
- ₹18,055.56
- Total interest
- ₹1,50,000
- Total repaid
- ₹6,50,000
- Interest if 10.00% were reducing balance
- ₹80,809
A flat rate charges interest on the full ₹5,00,000 for the whole term. The reducing rate shown is the one that produces the same instalment when interest is charged only on what is still owed. Fees are not included. Monthly instalments, paid at the end of each month.
Share these numbers
The same 10.00% flat at other tenures
| Tenure | Equivalent reducing balance rate |
|---|---|
| 1 year | 17.97% |
| 2 years | 18.16% |
| 3 years | 17.92% |
| 4 years | 17.60% |
| 5 years | 17.27% |
| 7 years | 16.66% |
Runs entirely in your browser. No sign-up, and nothing you type is sent anywhere. How the maths works.
What the converter does
Lenders quote interest in two ways. A flat rate charges interest on the amount you first borrowed, every year, however much you have paid back. A reducing balance rate charges interest only on what you still owe. Most bank loans in India are priced on a reducing balance. Flat rates still turn up in vehicle finance, consumer loans and informal lending.
The converter answers one question: what would this rate be called if it were quoted the other way? It does not say which loan to take. A flat-rate loan can still be the cheaper one if its number is low enough. You can only tell once both are on the same basis.
A worked conversion
Take ₹5,00,000 over 36 months at 10% flat.
- Flat interest for the whole term: ₹5,00,000 × 10% × 3 years = ₹1,50,000.
- Instalment: (₹5,00,000 + ₹1,50,000) ÷ 36 = ₹18,055.56.
- Find the reducing balance rate at which ₹18,055.56 a month repays ₹5,00,000 in 36 months. That rate is 17.92%.
The third step has no tidy formula. The reducing balance EMI formula cannot be rearranged to give the rate, so the converter tries rates until the instalment matches, narrowing in until the answer stops changing.
Computed by the site's engine
10% flat, 36 months
- Instalment
- ₹18,055.56
- Total interest
- ₹1,50,000
- As a reducing rate
- 17.92%
Computed by the site's engine
10% reducing, 36 months
- Instalment
- ₹16,133.59
- Total interest
- ₹80,809
- As a flat rate
- 5.39%
Same loan, same tenure, same "10%". On a flat basis the interest is ₹1,50,000. On a reducing basis it is ₹80,809. The difference, ₹69,191, is the price of not asking which kind of 10% it was.
Going the other way
Converting a reducing rate to flat is simpler. Work out the total interest on the reducing balance loan, then express it as a yearly percentage of the original amount: ₹80,809 ÷ ₹5,00,000 ÷ 3 years = 5.39%. This is useful when one lender quotes flat and you want to see what your bank's reducing rate would look like on the same sheet.
What it leaves out
- Fees. A processing fee raises the real cost of either loan. The annual percentage rate counts fees. This conversion does not.
- Prepayment. On a reducing balance loan, paying early saves the interest on what you repay. On many flat-rate loans the interest is fixed at the start, and what you get back for closing early depends on the lender's terms.
- Other schedules. The converter assumes equal monthly instalments paid at the end of each month.
For the reasoning behind the two methods, read flat rate vs reducing balance.