Interest is the additional amount paid to the lender on top of the principal loan amount. Loan interest rates are typically calculated in a similar way across different banks. The interest rate is usually expressed as a percentage of the loan, which is calculated annually and referred to as the Annual Percentage Rate (APR). Each EMI (Equated Monthly Installment) consists of two components – part of it goes towards the principal amount, while the rest goes towards the personal loan interest. In most cases, the interest portion is higher at the start of the loan tenure, and the principal portion gradually increases as the loan term progresses.

On the other hand, the EMI calculated for the principal amount is lower initially, but increases over time. Various methods can be used to calculate interest rates, and depending on the method, you may get the best interest rate for a personal loan.

The first distinction lies in whether the interest is calculated on the original principal or on the outstanding principal balance. Below, we explain the difference between reducing balance interest rates and flat interest rates.

A flat interest rate is a lending rate that remains constant throughout the loan tenure. The interest is calculated on the total loan amount at the beginning of the loan period. The financial institution determines the repayment schedule and the EMIs the borrower needs to pay. This setup keeps the total repayment liability fixed, which helps borrowers plan their finances in advance. However, flat interest rates are generally higher than reducing balance rates.

In the case of a reducing balance interest rate, the personal loan interest is calculated based on the amount of principal outstanding at a given time. As mentioned earlier, part of each EMI goes towards the principal, and the remaining amount goes toward interest. When interest is computed, it is done on the remaining principal balance, not on the original loan amount.

Here are the major differences between flat and reducing interest rates:

1. Calculation Method: In a reducing rate, the interest is calculated based on the diminishing principal amount, while in a flat interest rate, it is calculated on the full principal amount from the start.
2. Comparison Rate: The interest rate under a flat rate is usually higher than the reducing interest rate, which is calculated on a diminishing principal.
3. Effective Interest Rate: Flat rate calculations result in a higher effective interest rate, while reducing rates reflect a lower effective interest rate initially.
4. Ease of Calculation: Calculating a flat interest rate is simpler compared to reducing interest rates, which involve more complex calculations.

With a flat interest rate loan, the interest is calculated on the initial principal amount for the entire loan tenure.

Principal (P)

Annual Interest Rate (I) – in percentage

Tenure (T) – in years

Total Interest = (P * I * T) / 100

Total Amount to Be Repaid = P + (P * I * T) / 100

Monthly EMI = (P + (P * I * T) / 100) / T * 12 (T is in years)

In a reducing balance interest rate loan, the interest is calculated on the remaining principal amount at any given time.

Where –

• P is the principal amount
• I is the interest rate / (100 x 12)
• T is the number of years x 12

Total Interest = Monthly EMI x T – P

Total Amount = Monthly EMI x T

The Flat vs Reducing Interest Rate Calculator helps you compare the two interest calculation methods and decide which one is more suitable for you. It also allows you to see the difference in the interest you would pay on your EMIs.

The Sensex India calculator makes it easy for you to enter your loan details and get results quickly. Here’s how to use it:

Step 1: Enter the principal loan amount in the calculator.

Step 2: Fill in the agreed-upon tenure and interest rate.

Step 3: Click on ‘Calculate’ to find out how much interest you will pay on your loan.

• The Sensex India calculator is an easy-to-access tool that you can use anytime, from anywhere.
• It provides you with the interest you will pay on your loans in a matter of seconds.
• The calculator saves you time and effort that would otherwise go into manual calculations.
• It helps you assess how much your loan will cost you in total.
• It’s a simple tool for planning your loan strategy.
• All you need are the basic loan details to use the calculator.
• You can easily compare the two most commonly used interest calculation methods and see the difference in the interest paid.