8% flat over 5 years is 14.13% reducing
- Loan amount
- ₹5,00,000
- Quoted flat rate (per year)
- 8%
- Tenure
- 5 years
What it really costs, as a reducing-balance rate14.13%
DRV-004 verified table
Open this exampleFinance & LoansloansIndia only
Flat vs Reducing Interest Rate Calculator
A flat rate charges interest on the original principal for the whole term, whatever you have repaid. This works out what that actually costs as a reducing-balance rate. For an 8% flat loan over five years, 14.13%.
Also called: flat rate to reducing rate, effective rate on flat loan.
What it really costs, as a reducing-balance rate
14.13%
A 8% flat loan over 5 years costs exactly what a 14.13% reducing-balance loan costs. The EMI is ₹11,667 either way, and total interest is ₹2,00,000.
Monthly instalment
₹11,667
Total interest
₹2,00,000
Total repayment
₹7,00,000
How much the quoted rate understates the cost
6.13%
An estimate, not an offer or a guarantee. Projected returns assume the rate you entered holds for the whole term, which no market does.
Method and background
This is what the calculation gives for the numbers you entered. It is an estimate, not advice, and it knows nothing about your situation beyond those numbers. Rules for India change on a published schedule; the effective date is shown on every rule-based tool.
How this is calculated
Under a flat rate the interest is P × r × T regardless of repayment, so the instalment is simply the total divided by the number of months. To find the equivalent reducing rate, take that same instalment and solve the annuity formula backwards for i. There is no closed form, so the engine bisects. The common heuristic (roughly 2n/(n+1) times the flat rate) gives 15.74% on this example, close enough for conversation and too crude to publish.
E = P*(1 + rf*T)/n; then solve for i in P*i(1+i)^n/((1+i)^n - 1) = E- r_f
- The quoted flat rate, per year (decimal)
- T
- Term in years (years)
- i
- Equivalent monthly reducing-balance rate (decimal)
Full derivation: Why an 8% flat loan is really a 14.13% loan
Worked examples
Each of these is asserted on every build. If a change to the engine ever moved one of these answers, the build would fail before the page could print it.
10% flat over 3 years is 17.92% reducing
- Loan amount
- ₹3,00,000
- Quoted flat rate (per year)
- 10%
- Tenure
- 3 years
What it really costs, as a reducing-balance rate17.92%
DRV-004 verified table
Open this examplea one-year flat loan is closest to its quoted rate
- Loan amount
- ₹1,00,000
- Quoted flat rate (per year)
- 12%
- Tenure
- 1 years
What it really costs, as a reducing-balance rate21.46%
engine bisection; the shorter the term, the smaller the gap between the two conventions
Open this exampleWritten about this
- A 10% flat rate is a 17.3% loan · 2 min · Flat rate and reducing balance are two ways of quoting interest, and they are not close. On a five year loan a 10% flat rate costs the same as 17.3% reducing.
Method and limits
What it assumes
- The flat rate is applied to the original principal for the full term.
What it deliberately does not model
- Processing fees and insurance premiums are excluded; both raise the effective cost further.
Formula version 1.0.0 · definition 1.0.0 · India · Report a problem with this calculator
Frequently asked questions
- Why is a flat rate so much more expensive than it sounds?
- Because you keep paying interest on money you have already repaid. By the final year of a five-year loan you owe almost nothing but are still charged interest on the full original amount.