The difference
A reducing-balance rate charges interest only on what you still owe. As you repay, the interest each month gets smaller. This is how banks normally quote loans and how APR is calculated.
A flat rate charges interest on the full original amount for the whole term, even though you are paying it back every month. Halfway through the loan you owe about half, but you are still paying interest as if you owed all of it.
A worked example
A lender offers ₹5,00,000 for 5 years at 7% flat.
- Interest: ₹5,00,000 × 7% × 5 years = ₹1,75,000
- EMI: (₹5,00,000 + ₹1,75,000) ÷ 60 = ₹11,250
Paying ₹11,250 a month for 60 months on ₹5,00,000 is the same as a reducing-balance rate of 12.50%. The “7%” loan really costs 12.5% a year.
Quick conversion table
| Flat rate | Term | Real reducing rate |
|---|---|---|
| 5% | 5 years | 9.15% |
| 7% | 3 years | 12.83% |
| 7% | 5 years | 12.50% |
| 8% | 5 years | 14.13% |
| 10% | 5 years | 17.27% |
A useful rule of thumb: the real rate is roughly 1.75 to 1.85 times the flat rate. Use the calculator for the exact figure.
What the rules say
In India, banks and NBFCs must give you a Key Facts Statement showing the annual percentage rate on a reducing basis, including fees, before you sign. In Nigeria, banks must disclose the total cost of credit. If you are quoted only a flat rate, ask for the APR in writing.
Convert your own quote
Open the car loan EMI calculator (or the Nigeria calculator), choose “Find my EMI”, set the rate type to “Flat rate”, and enter your quote. It shows the EMI and the true reducing-balance rate.
Try it yourself
Open the car loan EMI calculator and enter your own loan. It works in 13 currencies and follows each country’s loan rules.