A ₹2 lakh personal loan at 12% flat for 36 months
A flat rate charges interest on the full ₹2 lakh for the entire 3-year term — even in the final month, when you owe almost nothing. That is why 12% flat is not 12%: on a reducing balance, the same EMI of ₹7,556 works out to 21.2% a year. The quote is not wrong, it is just measured against a balance you stopped owing years ago.
- Quoted rate
- 12% flat
- Effective rate
- 21.2%
- Monthly EMI
- ₹7,556
- Extra vs a true 12%
- ₹32,868
on the original amount
reducing balance equivalent
for 36 months
₹913 every month
Same EMI, three ways of describing it
| Rate | Monthly EMI | What it means |
|---|---|---|
| 12% flat | ₹7,556 | What the lender quotes |
| 21.2% reducing | ₹7,556 | The same EMI, measured honestly |
| 12% reducing | ₹6,643 | What 12% would cost if it meant what it says |
The first two rows are the same loan. Only the label changes.
12% flat on ₹2 lakh across tenures
| Tenure | Monthly EMI | Effective rate | |
|---|---|---|---|
| 12 months | ₹18,667 | 21.46% | |
| 24 months | ₹10,333 | 21.57% | |
| 36 months | ₹7,556 | 21.2% | This page |
| 48 months | ₹6,167 | 20.75% | |
| 60 months | ₹5,333 | 20.31% |
The longer the flat-rate loan runs, the wider the gap — because the balance you no longer owe keeps being charged.
Where you meet a flat rate
Smaller lenders and in-house finance desks still quote personal loans on a flat basis, usually because it makes an expensive loan sound cheap. The giveaway is a quote that leads with a low percentage and a round EMI, without a repayment schedule attached. Ask for the amortisation schedule; a reducing-balance lender will hand it over.
The arithmetic, in one line
Flat interest on this loan is ₹2 lakh × 12% × 3 years = ₹72,000, divided evenly across 36 EMIs. A reducing-balance loan charges interest only on what is still outstanding, which falls every month — so to collect the same rupees, the rate has to be 21.2%. As a rough rule of thumb, a flat rate is close to double the reducing rate over a long tenure.
Zero-cost EMI is the same trick
A no-cost EMI offer usually works one of two ways: the interest is added to the price before it is split, or the retailer discounts the item and the bank charges you interest on the undiscounted figure. Either way, paying upfront would have cost less. Compare the cash price against the total of all EMIs — that difference is the real cost of the credit.
Where FamTally comes in
Add the loan to FamTally as a flat-rate loan and it shows you the reducing-balance rate you are really paying — 21.2% here — alongside every other loan the family carries, ranked by what each one actually costs. When you have a spare lump sum, that ranking tells you which debt to kill first. Free to use.
Stop doing this in a spreadsheet
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Start freeQuestions people ask
What is 12% flat as a reducing rate?
On ₹2 lakh over 36 months, 12% flat is equivalent to 21.2% on a reducing balance. Both produce the same EMI of ₹7,556.
Why is the flat rate more expensive?
Because it charges interest on the full ₹2 lakh for all 36 months, even though your outstanding balance falls with every EMI. You end up paying interest on money you have already repaid.
How do I convert a flat rate myself?
Work out the EMI — (principal + principal × rate × years) ÷ months — then find the reducing rate that produces the same EMI. A rough shortcut for a multi-year loan is to just about double the flat rate.
Should I ever take a flat-rate loan?
Only after converting it. If 21.2% still beats every other option available to you, it is a fair deal. If a bank will lend at less than that on a reducing basis, take the bank.