Key Takeaways
- Reducing-balance interest is charged on what you still owe.
- Flat-rate interest is charged on the original principal throughout.
- The same flat rate is more expensive than the same reducing rate.
- Always compare loans on the effective (reducing-balance) rate.
Reducing-balance interest
In a reducing-balance loan, interest each period is calculated on the outstanding balance. As you repay principal, the balance shrinks, so the interest portion of each EMI falls over time. This is how standard EMIs work.
Flat-rate interest
A flat-rate loan charges interest on the full original principal for the entire tenure, regardless of how much you have repaid. Because you are effectively paying interest on money you have already returned, a flat rate is more expensive than the same-numbered reducing-balance rate.
Comparing fairly
When comparing loan offers, convert everything to an effective reducing-balance basis, or compare the total interest paid. A low-looking flat rate can cost more than a higher reducing rate. The EMI calculator uses the reducing-balance method and shows total interest so you can compare offers on a consistent basis.
Sources
We reference primary and official sources. Rate- and rule-dependent details must be verified against the latest official information.
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Fixed vs Floating Interest Rates
A fixed rate keeps your EMI constant regardless of market movements; a floating rate moves with a benchmark, so your EMI or tenure can change over time.
loansHow Is EMI Calculated?
An EMI is calculated with a standard formula from the loan amount, the monthly interest rate, and the number of months. Each EMI pays some interest and some principal.
loansHow Loan Prepayment Works
Prepaying a loan reduces the outstanding principal, which lowers future interest. You can usually choose to shorten the tenure or reduce the EMI — shortening tenure saves the most interest.