Flat Rate Vs Diminishing Rate

Very often we come across advertisements which offer lower rate of interest rate on loans. Many times, the lending institutions resort to advertising rate of interest with a asterisk mark and the asterisk mark will say that the rate of interest is a Flat rate. Some lenders advertise their loan products at Diminishing rate of interest. As a wise investor/borrower understanding both these types of Interest calculations will help you make correct decisions.

Flat rate method

Flat rate of interest is a simple rate of interest calculated on the full loan amount without giving effect to the amount of loan repaid.

Diminishing/Reducing Balance Method

On the other hand, diminishing/reducing rate of interest gives effect to the amount of loan repaid.

We will take the following calculation :-

Loan Amount              Rs 100000/-

Tenure                         5 Years

Rate of Interest           10% p.a.

Flat rate Method

Interest Amount          =          Rs. 50000/-

(100000 x 10% x 5)

EMI Amount              =          Rs. 2500/- per month for 5 years

(Rs. 150000 / 60 months)


Diminishing/Reducing method 

EMI Amount              =          Rs. 2125/-

Total Amount paid      =          Rs. 127500/-

Interest Amount          =          Rs. 27500/-

The difference in Interest amount under both the methods is on account of the fact that under reducing/diminishing balance method, the principal repaid every month is taken into account for Interest/EMI calculation and as a result, the total interest amount under reducing balance is lesser than that of the interest as per Flat method.

We provide herewith the following tools for various calculations :-

1)      Tool to Find out rate of Interest from EMI

2)      Flat rate to Diminishing rate covertor

3)      Diminishing rate to Flat rate convertor

Hope these tools will serve as an aid to make your decisions.

Click here to send your enquiry/feedback

Worksheet to find out Rate of Interest from EMI      [wpdm_file id=3]

Flat rate to Diminishing Rate Convertor [wpdm_file id=4]

Diminishing Rate to Flat rate Convertor [wpdm_file id=2]

3 thoughts on “Flat Rate Vs Diminishing Rate”

  1. can you plz let me know which kind of interest rate should i opt for procuring personal loan amount of 4lacs for tenure 3years. i am being offered flat rate of 8.2%. i am feeling this as injustice since they are not taking into account of my reducing principle amount over period of time. how should ensure that they dont cheat me.

  2. Dear Sharanayaa,

    This is one of the Marketing techniques followed by the lending institutions/marketing agents.

    Effectively, on an average, the rate of Interest on Diminishing method will be double that of the Flat rate.

    You have not provided the details of the loan.

    Assuming the loan amount as Rs. 1 Lakh and the same is payable in 12 EMIs @ 8.2% the EMI works out to Rs. 9017 for 12 months.

    For the EMI of 9017 for 12 months for a Loan of Rs. 1 Lakh, the rate of Interest under diminishing method will be 14.81%. This effectively means you are paying 14.81% diminishing rate of interest on your loan.

    If you are able to get any other source of loan less than diminishing rate of 14.81%, you can consider the same.

  3. I have two cases :
    Case 1 :
    Loan amount : Rs. 16,30,000/-
    Interest : 10.95% Fixed (is fixed same as flat?)
    Tenure : 10 Years / 12 emi/year
    EMI : Rs. 22,512/-

    Case 2 :
    Loan amount : Rs. 4,42,000/-
    Interest : 15% Annual Diminishing rate (What is this annual?)
    Tenure : 4 Years / 12 emi/year
    EMI : Rs. Case 1 :
    Loan amount : Rs. 16,30,000/-
    Interest : 10.95% Fixed (is fixed same as flat?)
    Tenure : 10 Years / 12 emi/year
    EMI : Rs. 12,301/-

    Now my question is, whether loan @ case 1 is bearning more interest or case 2. and which one is advisable to be preclosed.

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