A personal loan advertised at 10% flat costs about the same as a 17.9% reducing-balance loan. That gap is the whole reason to learn the conversion. To convert a flat interest rate to a reducing rate, work out the EMI the flat rate produces, then find the reducing-balance rate that gives the same EMI over the same number of months, using Excel’s RATE function or an online loan calculator. As a rough guide, the reducing rate lands at a bit under double the flat rate. This guide is written for borrowers in India and uses rupee figures throughout.
Why 10% Flat Works Out Near 18% on a Reducing Balance
- A flat rate charges interest on the original loan amount for the full tenure, even as you repay principal every month.
- A ₹2 lakh, three-year loan at 10% flat has an EMI of ₹7,222 and works out to 17.92% on a reducing balance.
- In Excel or Google Sheets, =RATE(months, -EMI, loan amount)*12 gives the equivalent reducing rate in one step.
- Since October 2024, RBI-regulated lenders must show an Annual Percentage Rate (APR) in the Key Facts Statement for retail and MSME term loans, which makes flat-rate quotes easier to compare.
What Is a Flat Interest Rate?
Under a flat rate, the lender calculates interest once, on the full amount you borrowed, and spreads it evenly across the tenure. The arithmetic is simple, as AU Small Finance Bank’s explainer sets out: total interest equals loan amount × flat rate × tenure in years, and the EMI is the loan plus that interest, divided by the number of months. The same explainer notes that flat rates still turn up in personal loans, vehicle loans and some consumer durable loans, particularly from NBFCs and consumer finance companies.
The catch is that you never owe the full amount for the full tenure. Every EMI repays a slice of principal. By the last year of a three-year loan you might owe a third of what you borrowed, yet a flat-rate loan keeps charging interest as if the whole sum were still outstanding.
How a Reducing Balance Rate Differs
A reducing balance (or diminishing balance) rate charges interest each month only on the principal still outstanding. Home loans, most bank personal loans and business term loans work this way, and it is the method behind the standard EMI formula covered in our guide on how to calculate EMI. Because the base shrinks every month, the same headline percentage costs far less than it would on a flat basis.
How to Convert a Flat Rate to a Reducing Rate, Step by Step
There is no neat algebraic formula that turns one into the other exactly. The conversion is a search for the interest rate that makes a stream of equal EMIs worth exactly the loan amount today. Spreadsheets do that search for you.
- Find total interest: multiply the loan amount by the flat rate and by the tenure in years.
- Find the EMI: add the total interest to the loan amount and divide by the number of monthly instalments.
- Solve for the rate: in Excel or Google Sheets, type =RATE(number of months, -EMI, loan amount). Microsoft’s documentation says RATE returns the interest rate per period, so the answer is a monthly rate.
- Annualise it: multiply the monthly rate by 12. That figure is the reducing-balance rate a bank would quote for the same EMI.
The EMI goes in as a negative number because it is money leaving your account, while the loan amount comes in as a positive one. Microsoft’s own example follows the same convention: a loan of 8,000 repaid at -200 a month over four years returns 1% a month, which the page annualises by multiplying by 12.
Worked Example: ₹2 Lakh at 10% Flat for Three Years
Take a ₹2,00,000 personal loan quoted at 10% flat for 36 months. We ran every figure below in Python and cross-checked the rate with a RATE-style solver.
| Step | Calculation | Result |
|---|---|---|
| Total interest | ₹2,00,000 × 10% × 3 | ₹60,000 |
| Total repayable | ₹2,00,000 + ₹60,000 | ₹2,60,000 |
| EMI | ₹2,60,000 ÷ 36 | ₹7,222.22 |
| Monthly reducing rate | =RATE(36, -7222.22, 200000) | 1.493% |
| Annual reducing rate | 1.493% × 12 | 17.92% |
Put the other way round, a bank charging 10% on a reducing balance would ask for an EMI of about ₹6,453 on the same loan, and total interest of roughly ₹32,324. The flat-rate loan costs ₹60,000 in interest, about 1.86 times as much, though both carry the same “10%” on the brochure.
Where the Extra Interest Hides
Split each ₹7,222 EMI at the equivalent 17.92% rate and the first instalment is about ₹2,986 of interest and ₹4,236 of principal. By the third month interest has dropped to roughly ₹2,859 because the balance has fallen to about ₹1,87,101. The flat-rate statement, by contrast, shows the same ₹1,667 of interest in every one of the 36 months, which is why it looks gentler than it is.
| Month | Interest at 17.92% reducing | Principal repaid | Balance left |
|---|---|---|---|
| 1 | ₹2,986 | ₹4,236 | ₹1,95,764 |
| 2 | ₹2,923 | ₹4,299 | ₹1,91,465 |
| 3 | ₹2,859 | ₹4,363 | ₹1,87,101 |
Flat to Reducing Rate Conversion Table
Tenure matters less than most borrowers expect. The ratio between the two rates stays within a fairly narrow band, drifting lower for longer loans. Figures below are our calculations, assuming equal monthly EMIs and no fees.
| Flat rate | 1 year | 2 years | 3 years | 5 years |
|---|---|---|---|---|
| 8% | 14.45% | 14.68% | 14.55% | 14.13% |
| 9% | 16.22% | 16.43% | 16.24% | 15.71% |
| 10% | 17.97% | 18.16% | 17.92% | 17.27% |
| 12% | 21.46% | 21.57% | 21.20% | 20.31% |
| 14% | 24.91% | 24.92% | 24.40% | 23.25% |
Do Rules of Thumb Work?
Roughly. AU’s explainer suggests multiplying the flat rate by 1.8 to 2, and gives 9% flat as about 16% to 17% effective, which matches our 16.24% for a three-year loan. Another shortcut, flat rate × 2n ÷ (n + 1) where n is the number of months, gives 19.46% for our 10% example. That overshoots the true 17.92% by more than 1.5 percentage points. Use shortcuts to spot an expensive quote, then run RATE before signing anything.
Processing Fees Push the Real Cost Higher
The conversion above ignores fees, and lenders rarely do. If our ₹2 lakh loan carries a 2% processing fee deducted upfront, you receive ₹1,96,000 but still pay ₹7,222 a month for 36 months. Run RATE with ₹1,96,000 as the loan amount and the annual cost climbs to about 19.38%.
That all-in figure is what the RBI wants borrowers to see. Its circular on Key Facts Statements dated 15 April 2024 requires regulated lenders to give a KFS with an Annual Percentage Rate, defined as the annual cost of credit including interest and all other charges, for new retail and MSME term loans sanctioned on or after 1 October 2024. The same circular says a fee not listed in the KFS cannot be charged at any stage of the loan without the borrower’s explicit consent. A Vinod Kothari Consultants analysis notes that the APR is computed as an IRR, the same method as the RATE function.
How to Use This When Comparing Loans
- Ask for the KFS before you sign: compare APRs across lenders, not headline rates. A flat 11% and a reducing 18% can be almost the same loan.
- Compare EMIs for the same amount and tenure: if two offers have identical EMIs and fees, they cost the same, whatever the rate is called.
- Check prepayment terms: on a flat-rate loan, interest for the full tenure may already be baked into the schedule, so closing early can save less than you expect. Read the foreclosure clause.
- Model the repayment against cash flow: small business owners borrowing for equipment can test whether the EMI fits with our break-even calculator before committing.
Young entrepreneurs weighing a subsidised scheme loan against a private NBFC offer face the same arithmetic. Our guide to the CM Yuva scheme in Uttar Pradesh shows what an interest-free government-backed loan looks like next to a market-rate one. More explainers sit in our Finance section.
When a Flat Rate Is Not a Trap
Flat rates are a pricing convention, not a scam. A flat-rate offer can still be the cheapest option on the table if its converted rate and fees beat the alternatives. The trouble starts only when a borrower compares a flat 10% with a reducing 14% and picks the “lower” number. Once both are converted to APR, the decision usually makes itself.
This article is for information and education only and is not investment, tax or financial advice. Figures were checked on 29 October 2026; confirm current details with the official source or a registered adviser before acting.
Converting Flat Quotes and Whether Banks Still Use Them
Is 10% Flat Rate the Same as 10% Reducing Rate?
No. On a three-year loan, 10% flat works out to about 17.92% on a reducing balance, so it costs considerably more for the same headline figure.
What Is the Formula to Convert Flat Rate to Reducing Rate?
There is no exact closed-form formula. Calculate the flat-rate EMI, then use =RATE(months, -EMI, loan amount)*12 in Excel or Google Sheets to get the equivalent reducing rate.
How Do I Calculate EMI on a Flat Interest Rate?
Multiply the loan by the flat rate and the tenure in years to get total interest, add it to the loan, and divide by the number of months.
Which Is Better, Flat or Reducing Interest Rate?
Neither label is better on its own. Compare the APR in each lender’s Key Facts Statement, which folds in interest and fees, and choose the lower one.
Do Banks in India Still Charge Flat Interest Rates?
Some lenders still quote them, mainly on personal, vehicle and consumer durable loans from NBFCs. Since October 2024, regulated lenders must also disclose the APR in the KFS.
