Flat rate vs real rate: quick table
What common flat rates really cost a year on the reducing balance (the way banks quote). No fees included.
| Flat rate | 1 year | 2 years | 3 years | 5 years |
|---|---|---|---|---|
| 7% flat | 12.7% | 12.9% | 12.8% | 12.5% |
| 8% flat | 14.5% | 14.7% | 14.5% | 14.1% |
| 9% flat | 16.2% | 16.4% | 16.2% | 15.7% |
| 10% flat | 18% | 18.2% | 17.9% | 17.3% |
| 12% flat | 21.5% | 21.6% | 21.2% | 20.3% |
| 14% flat | 24.9% | 24.9% | 24.4% | 23.2% |
“1% a month flat” is 12% flat a year: over 3 years that is really 21.2% a year.
Why a flat rate looks cheap
Each EMI repays part of your loan. With a reducing rate, interest is charged only on the loan left, so it falls every month. With a flat rate, interest is charged on the full amount till the last EMI. On the example above you repay half the loan in about 21 months, but you keep paying interest on all ₹3 lakh.
So the same number — “10%” — means two very different costs. Always compare the reducing-balance rate or the APR.
Before you sign
- Ask: “Is this rate flat or reducing?” Get the answer in writing.
- Ask for the Key Facts Statement and check the APR in it.
- Add every fee: processing fee, GST on it, file charges, compulsory insurance.
- Check the foreclosure charge if you may close the loan early.
Source: RBI circular RBI/2024-25/18, “Key Facts Statement (KFS) for Loans & Advances”, 15 April 2024 — applies to retail and MSME term loans sanctioned on or after 1 October 2024. The real rate is the monthly rate at which your EMIs repay the money you receive, × 12.
Frequently asked questions
What is a flat interest rate?
With a flat rate, interest is worked out on the full loan amount for the whole tenure. On ₹3 lakh at 10% flat for 3 years, interest is ₹90,000 — as if you kept the full ₹3 lakh for all 3 years, even though your EMIs repay it bit by bit.
What is a reducing (diminishing) balance rate?
Interest is charged each month only on the loan left. As you repay, the loan left falls, so the interest falls too. Home loans and most bank loans use this method, and it is the rate you should compare.
How much higher is the real rate?
Roughly 1.7 to 1.8 times the flat rate. 10% flat for 36 months is really 17.9% a year on the reducing balance. See the table on this page for other rates.
Where are flat rates used?
Mostly for two-wheeler and car loans from dealers, consumer durable loans, some personal loans sold over the phone, and gold or microfinance loans. "1% per month flat" is the same as 12% flat a year.
How do I find the real rate of my loan offer?
Ask the lender for the Key Facts Statement (KFS). For retail loans sanctioned from 1 October 2024, the RBI requires every bank and NBFC to give it before you sign, with the APR — the yearly cost including all charges — and the repayment schedule.
Do fees change the real rate?
Yes. Fees you pay to get the loan mean you get less money but repay the same EMIs. With a ₹6,000 fee, the 10% flat loan above costs 19.4% a year instead of 17.9%.