Flat vs Reducing Interest Rate Calculator
How to Use the Calculator
Enter the following details:
Loan Amount: The principal amount borrowed.
Interest Rate: Annual interest rate applied to the loan.
Time Period: Loan tenure in either years or months.
Once you input these details, the calculator will provide:
1️⃣ Flat Interest Rate EMI and total interest amount.
2️⃣ Reducing Balance Interest Rate EMI and total interest amount.
How to Calculate Flat Interest Rate
Calculating flat interest rates is straightforward. Here’s a simple formula:
Total Interest = Principal × Rate × TenureFor example, for a ₹1,00,000 loan at a flat rate of 10% over 5 years:
Total Interest = ₹1,00,000 × 10% × 5 = ₹50,000To find the monthly EMI (Equated Monthly Installment):
EMI = (Principal + Total Interest) / Total MonthsEMI = (₹1,00,000 + ₹50,000) / 60 = ₹2,500How to Calculate Reducing Interest Rate
Calculating a reducing interest rate is slightly more complex because the interest decreases as you repay the principal. The formula for calculating interest for each month is:
Interest for the Month = Outstanding Principal × (Rate / 12)
You’ll need to calculate the interest and principal for each installment until the loan is fully repaid. However, many borrowers prefer using loan calculators available online for convenience.
Flat vs Reducing Interest Rate: Which is Better?
Choosing between flat and reducing interest rates depends on your financial situation and loan type. Generally, reducing interest rates are favored for their cost-effectiveness, as they result in lower total interest payments.
Flat interest rates might seem attractive initially due to lower monthly payments, but they can be more expensive in the long run. If you're planning to pay off your loan quickly, a reducing rate can save you significantly.
It’s crucial to assess your repayment capacity and long-term financial goals before deciding.
Frequently Asked Questions
What is the key difference between flat and reducing interest rates?
A flat interest rate charges interest on the full loan amount throughout the tenure, while a reducing balance rate applies interest only on the outstanding balance, reducing total interest costs.
Which type of interest rate is better?
Reducing interest rates are generally better for long-term loans, as they result in lower total interest payments. Flat rates may be preferable for short-term loans with lower EMIs.
Why do banks offer flat rates for some loans?
Flat rates are often used in consumer loans and vehicle financing because they provide simple EMI calculations and fixed payments.
How does prepayment affect reducing interest loans?
Prepayments reduce the outstanding principal, leading to lower future interest payments and overall cost savings.