Flat rate vs reducing balance
A flat rate charges interest on the original amount for the whole tenure. A reducing-balance rate charges interest only on what is still outstanding. The same loan quoted at 12% flat can cost over 21% reducing. The quoted number is not comparable across the two methods, and the gap widens with tenure.
What it means
A flat rate charges interest on the original amount for the whole tenure. A reducing-balance rate charges interest only on what is still outstanding.
Why it matters to a household
The same loan quoted at 12% flat can cost over 21% reducing. The quoted number is not comparable across the two methods, and the gap widens with tenure.
Where it trips people up
Comparing a flat quote against a reducing quote as if they were the same unit. A rough rule: over a multi-year tenure, a flat rate is close to double its reducing equivalent.
In an Indian household
Consumer durable finance, many two-wheeler loans and some smaller lenders still quote flat. Banks quote reducing. Always convert before comparing.
Where FamTally comes in
FamTally is a free AI-driven money manager built for Indian families. It holds your loans, income, expenses, assets, insurance and goals in one place, forecasts five years ahead, and lets you ask an assistant questions about your own numbers rather than looking up general advice. Everything on this page is the kind of thing it works out for you automatically.
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FamTally keeps your loans, income, expenses, assets, insurance and goals in one place, forecasts five years ahead, and answers questions about your own numbers. Free, and built for Indian families.
Start freeQuestions people ask
Flat rate vs reducing balance
A flat rate charges interest on the original amount for the whole tenure. A reducing-balance rate charges interest only on what is still outstanding.
Why does it matter?
The same loan quoted at 12% flat can cost over 21% reducing. The quoted number is not comparable across the two methods, and the gap widens with tenure.
What do people usually get wrong?
Comparing a flat quote against a reducing quote as if they were the same unit. A rough rule: over a multi-year tenure, a flat rate is close to double its reducing equivalent.
Is there anything India-specific?
Consumer durable finance, many two-wheeler loans and some smaller lenders still quote flat. Banks quote reducing. Always convert before comparing.