Guides · Personal loan
What is the difference between a flat interest rate and a reducing interest rate?
In short
A flat rate charges interest on the full original loan for the whole tenure, even as you repay it; a reducing rate charges interest only on what is still outstanding each month, which is how banks price personal loans. The same 10% costs nearly twice as much when it is flat, and RBI's Key Fact Statement rules end the confusion by requiring every lender to state the annual percentage rate, always on a reducing basis.
Updated 7 September 2026 · by Finsa, a Lending Service Provider — not a lender.
The worked example
₹1,00,000 over three years. Illustration only; your rate is the lender's to set.
| 10% flat | Interest ₹30,000 (10% × ₹1,00,000 × 3 years) · EMI ₹3,611 |
|---|---|
| 18% reducing | Interest about ₹30,100 · EMI ₹3,615 · effectively the same loan as 10% flat |
| 12% reducing | Interest about ₹19,600 · EMI ₹3,321 · about ₹10,000 cheaper than 10% flat |
Why flat costs so much more
With a reducing rate, the interest in each EMI is charged on the balance you still owe, so it falls every month as the principal falls. With a flat rate, the interest is fixed at the start on the whole amount and spread evenly, so in the last month you are paying interest on ₹1,00,000 while owing a few thousand. A rule of thumb: a flat rate is roughly 1.7 to 1.9 times its reducing equivalent over a two-to-five-year tenure.
Where flat rates still turn up
Vehicle loans from dealers, consumer-durable finance, gold loans at some lenders, and informal lending are where a flat rate is quoted, because a smaller number sells. Banks and NBFCs quote personal loans on a reducing basis. If you are told a rate without the word, ask which it is, and ask for the annual percentage rate.
The number that ends the argument
Since April 2024, RBI requires every regulated lender to give a Key Fact Statement before a retail loan is signed, and it must state the annual percentage rate: the true yearly cost including interest and every fee, computed on the reducing balance. Two loans quoted one flat and one reducing are compared in ten seconds on that line. If a lender will not give you a KFS, that is the answer to a different question.
Where Finsa stands
Finsa is not a lender: it reads your report with your consent and puts your profile in front of RBI-regulated banks and NBFCs, who decide eligibility, rate and approval. Checking your report through Finsa is a soft enquiry, which only you can see and which does not affect your score. Every offer that reaches you through Finsa comes from a regulated lender with its own Key Fact Statement, so what you compare is the APR, not a rate whose meaning depends on the word after it.
People also ask
- How do I convert a flat rate to a reducing rate?
- Roughly, multiply by 1.8 for a three-year loan; exactly, compute the EMI the flat rate produces and solve for the reducing rate that gives the same EMI. The Key Fact Statement does this for you as the APR.
- Are flat rates illegal in India?
- No, but a regulated lender must disclose the annual percentage rate on the Key Fact Statement, which is the reducing-basis cost, so a flat quote can no longer hide what it costs.
- Which is better for the borrower?
- Reducing, at any rate you are likely to be quoted, because interest falls as the balance falls. Compare loans on APR and total amount payable, never on the headline number alone.
Sources
One application. Our lender partners answer.
Two minutes, a soft check that never touches your score. RBI-regulated banks & NBFCs send the offers; you pick.
Indicative starting rate. Your actual rate, fees and eligibility are set by the lending partner based on your credit profile.