Question
What is the difference between flat and reducing-balance interest?
Answer
Bottom line: A flat rate charges interest on the full principal throughout, so it costs much more than a reducing-balance rate.
1. Flat rate
Interest is on the original principal for the whole tenure — a 12% flat rate is roughly a 21–22% effective rate.
2. Reducing balance
Interest is on the outstanding balance, which falls with each EMI.
3. Compare fairly
Always compare loans on a reducing or effective basis.
Check the real cost with our EMI Calculator.
This answer is general information based on the law as it stood when written and is not professional advice on your specific situation. Verify the current position and consult a qualified professional before acting. See our disclaimer.