Loans are more than just borrowed money; they are your saviours in difficult times. However, they also are a responsibility as you repay your principal loan amount with additional interest. The interest you pay on your loan is a constant reminder that you need to plan your repayment wisely. Understanding how interest works helps you to pay off your debt easily and efficiently.
We are here to help you understand how your loan repayments impact your wallet and how to choose a suitable loan type.
Try our flat vs reducing rate of interest calculator and make loan payoffs simple and appropriate for you.
Understanding Flat Vs Reducing Rate of Interest
What is a Flat Interest Rate?
When you borrow money at a flat interest rate, the interest is calculated on the complete loan amount throughout the tenure. Simply put, the interest percentage will be fixed; it will not change as the principal amount reduces with time. Therefore, your monthly payment will stay the same throughout the loan term.
What is a Reducing Interest Rate?
Reducing interest rate, also known as diminishing balance interest rate, is calculated based on the outstanding principal loan amount. Thus, as you pay your loan amount, the interest to be paid declines. In other words, the interest amount in your monthly instalments keeps reducing over time.
A Glance at EMI Calculations for Flat vs Reducing Interest Rate
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Row 1
- Feature
- Flat Interest Rate
- Reducing Interest Rate
-
Row 2
- Loan Amount
- ₹ 2,00,000
- ₹ 2,00,000
-
Row 3
- Interest Rate
- 10%
- 10%
-
Row 5
- Loan Tenure
- 3 years (36 months)
- 3 years (36 months)
-
Row 6
- Total Interest Paid
- ₹ 60,000
- Reduces each month as principal is paid off
-
Row 7
- Total Repayment
- ₹ 2,60,000
- Varies (interest decreases over time)
-
Row 8
- Monthly EMI
- ₹ 7,222
- Starts at ₹7,222 (but reduces over time as the interest portion decreases)
-
Row 9
- Interest for First Month
- ₹ 1,666.67
- ₹ 1,666.67
-
Row 10
- Principal Repayment in First Month
- ₹ 5,555.33
- ₹ 5,555.33
-
Row 11
- EMI Consistency
- Same each month
- EMI decreases over time as the interest portion reduces and more goes toward principal repayment
-
Row 12
- How Interest Is Calculated
- On the full loan amount
- On the remaining loan balance each month
Let’s go through the detailed steps of how each loan type is calculated.
How Flat Interest Rate Works
Let’s say you borrow ₹2,00,000 at a 10% flat interest rate for 3 years. Here's how it works:
Formula: Interest = (Loan Amount × Interest Rate × Loan Tenure) / 12
Example Calculation:
- Loan Amount: ₹2,00,000
- Interest Rate: 10%
- Loan Tenure: 3 years
Total Interest: ₹2,00,000 × 10% × 3 = ₹60,000
Total Repayment: ₹2,00,000 + ₹60,000 = ₹2,60,000
Monthly EMI: ₹2,60,000 ÷ 36 months = ₹7,222
So, with a flat interest rate, your monthly payment is ₹7,222, and this will stay the same for the entire loan term. You can add your loan details to our tool. Once you choose the calculation type, our flat interest rate calculator will show the full interest amount you pay and your monthly EMI amount.
The flat interest rate simplifies things by keeping the same EMI amount every month. The fixed monthly EMI amount allows you to plan for your financial goals and other responsibilities easily.
Features Comparison: Flat Vs Reducing Rate Of Interest
Flat or Reducing - which one gets you closer to your financial goals quickly? Still confused? Let’s check out both options, compare and find the perfect fit for you.
Here’s a simple breakdown of the different features of Flat vs Reducing Interest Rates:
How Reducing Interest Rate Works
Formula: Interest for Each Month = (Remaining Loan Balance × Interest Rate) / 12
Example Calculation: If you borrow ₹2,00,000 at 10% for 3 years, here is how your 1st month would look like:
- Loan Amount: ₹2,00,000
- Interest Rate: 10%
In the first month: - Interest = ₹2,00,000 × 10% ÷ 12 = ₹1,666.67
- EMI (₹7,222) minus the interest (₹1,666.67) = ₹5,555.33 will go toward paying off the principal.
As you repay the loan, the interest rate and amount will reduce each month because the remaining loan balance decreases.
Choose reducing interest rate if you want to save on interest amount. You will need to handle higher initial EMIs but you can plan to repay the loan early. It’s great for those who want their payments to decrease over time.
-
Row 1
- Factor
- Flat Interest Rate
- Reducing Interest Rate
-
Row 2
- Loan Suitability
- Ideal for short-term loans with fixed payments
- Great for long-term loans with lower costs
-
Row 3
- EMI Calculation
- Fixed EMI every month
- EMI stays the same, but interest drops over time
-
Row 4
- Total Cost
- More expensive overall
- Cheaper in the long run
-
Row 5
- Preferred for
- Predictable payments for short durations
- Long-term savings
-
Row 6
- Commonly Used for
- Vehicle Loans, Personal Loans, High Purchase Agreements
- Home Loans, Business Loans, Mortgages
We will be your GPS - turning loan decisions into a smooth ride with the right guidance.
Why Use Our Calculator
At Piramal Finance, we want you to feel confident in your loan decisions. Our flat vs reducing rate of interest calculator is designed to make borrowing easier for you.
- Fast And Simple: Just a few clicks and you will understand what interest rate works best for you. Easy to use, no complicated forms and quick results.
- Clear Comparison: You can quickly figure out the amount difference you pay with both the two interest types. You will get a clear idea of how each type will impact your pocket.
- Smarter Planning: With a clear understanding of each loan interest rate, you can make decisions confidently. We simplify your financial planning, so you can focus on reaching your life goals.
No more guesswork to choose your loan type! Try our dependable calculator now!
Who Should Use This Calculator?
Whether you are planning to buy a home, get a car, or manage personal expenses, this seamless calculator assists you in picking up the right loan for you. Here’s who should use it:
- Personal Loan Seekers: Whether you are planning a fancy vacation trip or home renovation, our tool will help you make clever decisions easily.
- Car or Home Loan Seekers: Understanding how the interest rate for your car or home loan impacts payments will help you make the smart choice.
- Anyone Thinking Ahead: If you’re planning about loans, it’s always good to know how different loan options can work for you.
Click here to simplify your financial journey!
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