APR vs Flat Rate

A flat rate and the true cost of borrowing can look like the same number while meaning very different things. Under a flat rate, interest is charged on the full original loan amount for the entire tenure, regardless of how much you have already repaid. The reducing-balance rate, closer to the APR you actually bear, charges interest only on the outstanding balance, which shrinks with every EMI.

That difference matters because a flat rate always looks smaller than the equivalent reducing-balance rate. Since the balance you owe falls over time but the flat-rate interest does not, a headline flat rate quietly costs much more than the same percentage on a reducing balance. Comparing two loans on flat rate against reducing balance, without converting them to the same basis, is misleading.

When you compare offers, the safest move is to put everything on a reducing-balance footing. The flat-rate vs reducing-balance guide walks through why the gap appears, and it helps to keep the principal and tenure fixed so you are comparing like with like.

Worked example. Borrow ₹5,00,000 for 3 years at a 10% flat rate and the EMI works out to about ₹18,056; the same 10% on a reducing balance gives an EMI of about ₹16,134. Put another way, a 10% flat rate is roughly equivalent to a 17.92% reducing-balance rate. Check any quoted offer in the EMI calculator; these figures are estimates for illustration.