When applying for a loan, one of the most important things to understand is the interest rate. Many of us compare loans based only on the interest percentage offered by lenders.
However, the way interest is calculated can make a notable difference to the total cost of the loan.
This is where Definedge’s Flat vs Reducing Rate Calculator becomes useful. It helps you compare both methods of interest calculation and plan how much you may actually pay over the loan tenure, before even the loan amount is credited in your bank account.
What is a Flat vs Reducing Rate Calculator?
Definedge’s Flat vs Reducing Rate Calculator is a free online tool that helps you compare loans based on flat interest rates and reducing balance interest rates.
The calculator helps you get an estimate of:
This makes it easier to evaluate loan offers and make informed borrowing decisions.
What is a Flat Interest Rate?
Under the flat interest rate method, interest is calculated on the entire loan amount throughout the loan tenure. Even though you continue repaying the loan every month, the interest is charged on the original loan amount.
Because of this, the total interest paid is generally higher.
Example:
Suppose you take a loan of ₹5,00,000 for 5 years at a flat interest rate. The interest will be calculated on ₹5,00,000 for the entire tenure, regardless of how much of the loan you have already repaid.
What is a Reducing Interest Rate?
Under the reducing balance method, interest is calculated only on the outstanding loan balance. As you repay your EMIs, the loan balance reduces. The interest for the next month is then calculated on the reduced balance.
This generally results in lower interest costs compared to a flat-rate loan.
Example:
If you take a loan of ₹5,00,000.
After every EMI payment, the outstanding loan amount decreases. Interest is calculated only on the remaining balance and not on the original loan amount.
How does the Flat vs Reducing Rate Calculator work?
Using Definedge’s Flat vs Reducing Rate Calculator is simple and easy.
You need to enter:
Based on these details, the calculator compares:
This helps you understand the actual impact of each interest calculation method.
Why use a Flat vs Reducing Rate Calculator?
Sometimes a loan with a lower-looking flat rate may actually cost more than a loan offered on a reducing balance basis.
Without comparing both methods, it can be difficult to understand the true borrowing cost. The calculator helps you:
Let’s understand with an example:
Under the flat rate method, interest is calculated on the full ₹5,00,000 throughout the tenure. Under the reducing balance method, interest is calculated only on the outstanding balance after each EMI payment. As a result, the total interest payable under the reducing balance method is usually lower.
The interest rate alone does not tell the complete story when evaluating a loan.
Frequently Asked Questions (FAQs)