Why is the equivalent rate almost double the flat rate?

Because you repay the loan gradually but are charged interest on the whole original amount throughout. By the end you owe very little and are still paying interest on the full sum, which roughly doubles the effective cost.

Where will I run into flat rates?

Dealer vehicle finance, consumer durable loans at the point of sale, some gold loans and much informal lending. Banks quoting home and personal loans use reducing rates.

Is a flat rate ever the better deal?

It can be, if the flat number is low enough. Seven per cent flat over five years is worse than eleven per cent reducing; five per cent flat might not be. Convert first, then compare.

How does the tool find the equivalent rate?

It searches for the reducing rate that produces exactly the same monthly instalment as the flat quote, narrowing the range until the two match. There is no closed formula, which is why so few comparisons are done by hand.

Flat vs Reducing Rate Calculator

What a flat rate really costs once it is stated as a reducing one.

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Result

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Ask about Flat vs Reducing Rate Calculator

Questions about what this tool does, which option to pick, or what it can and cannot handle.

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About the Flat vs Reducing Rate Calculator

A flat rate charges interest on the full original amount for the full term, regardless of how much you have already repaid. A reducing rate charges only on what is still outstanding. The same percentage means something entirely different under each, and the gap is roughly a factor of two.

Consider a five-lakh loan over five years at a flat seven per cent. The interest is thirty-five thousand a year for five years — a hundred and seventy-five thousand — even though by the final year you owe barely a fifth of the original amount and are still paying interest as if you owed all of it. Expressed as a reducing rate, which is how banks and regulators quote loans, that same deal is closer to twelve and a half per cent. The instalment is identical; only the honesty of the description differs.

This tool solves for that equivalent rate. There is no formula for it, so it searches for the reducing rate that produces exactly the same instalment as the flat quote, which is the only meaningful basis for comparison. Enter a competing reducing-rate offer in the last field and it will tell you which of the two loans is actually cheaper.

Flat quoting is most common in dealer vehicle finance, consumer durable loans, gold loans from smaller lenders, and much informal lending. It is not illegal and it is not always a bad deal — but a flat seven and a reducing eleven are not what they appear to be relative to each other, and choosing between them on the quoted numbers alone reliably picks the worse one.

Ask any lender to state the annualised reducing rate before comparing offers.

How to use it

1Enter the loan amount, the flat rate you were quoted and the tenure.
2Read the equivalent reducing rate — that is what the loan actually costs.
3Put a competing bank's reducing-rate quote into the last field.
4Compare the two totals rather than the two headline percentages.

Questions

Why is the equivalent rate almost double the flat rate?: Because you repay the loan gradually but are charged interest on the whole original amount throughout. By the end you owe very little and are still paying interest on the full sum, which roughly doubles the effective cost.
Where will I run into flat rates?: Dealer vehicle finance, consumer durable loans at the point of sale, some gold loans and much informal lending. Banks quoting home and personal loans use reducing rates.
Is a flat rate ever the better deal?: It can be, if the flat number is low enough. Seven per cent flat over five years is worse than eleven per cent reducing; five per cent flat might not be. Convert first, then compare.
How does the tool find the equivalent rate?: It searches for the reducing rate that produces exactly the same monthly instalment as the flat quote, narrowing the range until the two match. There is no closed formula, which is why so few comparisons are done by hand.