Calculate and compare flat rate vs reducing balance loan EMI, total interest, and total repayment for any loan amount, interest rate, and tenure.
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Flat vs Reducing Interest Formula
A flat rate loan charges interest on the full original principal for the whole term, while a reducing balance loan charges interest only on the outstanding balance, which falls with every payment.
Flat EMI = (P + (P * R * T) / 100) / (T * 12)
Reducing EMI = (P * i * (1 + i)^n) / ((1 + i)^n - 1)
Where:
- P is the loan amount (principal).
- R is the annual interest rate as a percent.
- T is the loan tenure in years.
- i is the monthly interest rate, equal to R / 100 / 12.
- n is the total number of monthly payments, equal to T * 12.
For the flat method, total interest equals P * R * T / 100 and is split evenly across every month, so the EMI never changes and is not affected by how fast you repay. For the reducing method, each month’s interest is charged on the remaining balance, so the interest share of each EMI shrinks over time and the total interest paid is lower for the same nominal rate.
Interest Cost Comparison
The table below compares total interest on a $100,000 loan over 5 years (60 months) at several nominal rates, calculated both ways. Flat interest is always higher because it ignores the principal you have already repaid.
| Nominal Rate | Flat Total Interest | Reducing Total Interest | You Save |
|---|---|---|---|
| 6% | $30,000 | $15,997 | $14,003 |
| 10% | $50,000 | $27,482 | $22,518 |
| 14% | $70,000 | $39,576 | $30,424 |
As a rough guide, a flat rate is close to twice as expensive as the same reducing balance rate over a typical term, so a 10% flat loan behaves much like an 18% to 19% reducing balance loan in effective cost.
Example
Suppose you borrow $100,000 at a 10% annual rate for 5 years.
Flat method: total interest is 100,000 * 10 * 5 / 100 = $50,000. Total payable is $150,000, and the monthly EMI is 150,000 / 60 = $2,500.00.
Reducing method: the monthly rate is 10 / 100 / 12 = 0.008333 and there are 60 payments. The EMI works out to $2,124.70, total payable is $127,482.27, and total interest is $27,482.27. Choosing the reducing balance loan saves $22,517.73 in interest for the same nominal rate.
FAQ
Why is a flat rate loan more expensive than a reducing balance loan at the same rate?
A flat rate charges interest on the original principal for the entire term, even though you are steadily paying that principal down. A reducing balance loan only charges interest on what you still owe, so the interest you pay falls every month.
How do I convert a flat rate to an effective reducing rate?
There is no exact one-step formula, but a flat rate is roughly equivalent to a reducing balance rate of about 1.8 to 1.9 times its value over common tenures. To compare two loans precisely, calculate the total interest of each with this tool and compare the figures directly.
Which loans use which method?
Flat rates are common on some auto loans, personal loans, and short term consumer financing. Reducing balance is standard for mortgages, credit cards, overdrafts, and most student loans.