Flat-rate versus reducing-rate loans: compare the rupee repayments
A flat rate and a reducing-balance rate should not be compared as if their percentages used the same base. Start with the total repayment and the cash received, then examine the pricing method.
Identify the interest base
Under a simple flat-rate illustration, interest is calculated on the original amount for the stated period. In a reducing-balance illustration, the calculation follows the declining principal. Ask for the full schedule, fees and disclosed overall cost so the comparison uses actual cash flows. A smaller displayed flat percentage does not by itself prove the loan is cheaper than a higher reducing percentage.
A worked situation
At an assumed flat 10% a year on ₹1 lakh for three years, simple interest is ₹30,000 and repayments total ₹1.3 lakh before charges. The corresponding instalment spread evenly over 36 months is about ₹3,611.11. This is an illustration of the method, not an equivalent reducing-rate quote.
Your next-step checklist
- Identify flat or reducing treatment explicitly
- Compare total payments and net funds received
- Request the disclosed overall cost measure
Can I convert flat to reducing by doubling the rate?
A rough shortcut can be misleading. The equivalent depends on the term, payment timing and charges. Use the actual cash-flow schedule or the lender's disclosed calculation.
Official references and further reading
These links help you check current information. A provider-specific page describes that provider’s process; it is not a universal eligibility rule or a claim of partnership.
General educational information, not a personalised credit recommendation. Examples use assumed inputs. Rates, charges, eligibility and documents vary; confirm your own lender’s current written terms.