Flat to reducing rate converter
Car dealers, two-wheeler showrooms and some lenders quote a "flat" rate that looks half the size of a bank's rate. Enter the quote to see the true reducing-balance rate, and compare it with any bank offer in rupees.
Enter the loan offer
What a flat rate means
A flat rate charges interest on the full loan amount for the whole tenure, as if you never repaid any of it. A reducing-balance rate, which banks quote for home and most car loans, charges interest only on what you still owe, so the interest falls every month as you repay. The same number means very different costs under the two methods.
A worked example
A dealer offers ₹8 lakh at 6% flat for 5 years. Total interest is ₹8,00,000 × 6% × 5 = ₹2,40,000, so the EMI is (₹8,00,000 + ₹2,40,000) ÷ 60 = ₹17,333. The reducing-balance rate that gives the same EMI is 10.85%.
| ₹8 lakh, 5 years | EMI | Total interest | True rate |
|---|---|---|---|
| Dealer: 6% flat | ₹17,333 | ₹2,40,000 | 10.85% |
| Bank: 9.5% reducing | ₹16,801 | ₹2,08,089 | 9.50% |
| Difference | ₹532 a month | ₹31,911 |
The "6%" loan costs about ₹32,000 more than the 9.5% bank loan.
Flat to reducing rate conversion table
The true rate depends on the flat rate and the tenure, not on the loan amount, so this table works for any loan size:
| Flat rate | 3 years | 5 years | 7 years |
|---|---|---|---|
| 5% flat | 9.31% | 9.15% | 8.97% |
| 6% flat | 11.08% | 10.85% | 10.58% |
| 7% flat | 12.83% | 12.50% | 12.16% |
| 8% flat | 14.55% | 14.13% | 13.69% |
How the converter works
It first works out the flat-rate EMI: (loan + loan × flat rate × years) ÷ months. It then finds the reducing-balance rate whose standard EMI, (P × r × (1 + r)n) ÷ ((1 + r)n − 1), comes to exactly the same amount. There is no neat formula for that rate, so the converter narrows it down numerically to a fraction of a basis point. The EMI formula is explained step by step in our worked EMI example.
Questions people ask
Is the true rate always double the flat rate?
Not exactly. It is a little under double: about 1.7 to 1.9 times for common rates and tenures. On an evenly repaid loan your average balance is roughly half the original amount, so paying interest on the full amount is close to paying twice the rate. If a flat quote is more than half a bank's reducing rate, the bank is probably cheaper.
Why do dealers quote flat rates?
Because the number looks smaller. A flat rate is easy to calculate on paper, and "6%" sounds better than "10.85%". Under RBI rules, lenders must give you a Key Fact Statement showing the annual percentage rate (APR) including fees. Ask for it and compare APRs.
Does prepaying a flat-rate loan save much?
Often less than you expect. Many lenders work out the outstanding amount using the loan's effective rate or the Rule of 78, which front-loads interest. On the ₹8 lakh example, after 24 EMIs you would owe about ₹5.31 lakh, not the ₹4.8 lakh a simple split suggests. If you plan to pay extra or close early, a reducing-balance loan is usually the better choice.
What about processing fees and insurance?
This converter compares interest only. Processing fees, documentation charges and insurance bundled into the loan raise the real cost of either offer, so add them to each side before deciding.
Is a dealer offer ever better?
Sometimes. A cash discount, free accessories or a manufacturer subsidy can outweigh the extra interest. Put those benefits in rupees, subtract them from the flat loan's interest, and compare again.
For the full explanation, read Flat rate vs reducing balance: why a "flat 6%" car loan costs about 11%.
Assumes monthly EMIs, no fees and no insurance. Your lender's Key Fact Statement is the final word. This calculator is for education and estimates only.