Flat rate or reducing balance?
"12% flat" is not 12%. The same loan both ways — instalment, total interest, and the true reducing-balance rate hidden inside a flat quote.
A flat rate is legal and common — vehicle finance, hire purchase, some cooperatives. It simply costs roughly twice what the number suggests. Know which one you are being quoted before you sign.
Quoted flat, 12.00% is charged on the full रू 5,00,000 for all 36 months — रू 1,80,000 of interest, even though the amount you actually owe falls every month.
On a reducing balance the same 12.00% costs रू 97,857.63. To cost what the flat loan costs, a reducing-balance loan would need a rate of about 21.20% — that is the number to compare against a bank.
Neither is dishonest on paper. But the same word — percent — means two different things, and only one of them is the cost.
| Year | Monthly interest, flat | Monthly interest, reducing | Balance, reducing |
|---|---|---|---|
| 1 | 5,000 | 3,657.42 | 3,52,792.29 |
| 2 | 5,000 | 2,015.07 | 1,86,914.95 |
| 3 | 5,000 | 164.43 | 0 |
- Ask any lender one question: "Is that flat, or reducing?" If flat, ask for the reducing-balance equivalent in writing.
- Compare 21.20% — not 12.00% — against what a bank offers.
- Flat: interest = principal × rate × years, split equally across the instalments.
- Reducing: the EMI formula, interest on the balance still owed each month.
- Equal monthly instalments; no fees, insurance or processing charges on either side.
- The true rate is the reducing-balance rate that gives the flat instalment exactly.
A worked example
The form starts with these figures (in NPR) so you can see how it works before typing your own. They are made up — nobody's real numbers appear here.
Questions people ask
What is a flat rate?
Interest charged on the original loan amount for the whole term, as if you never repaid any of it. It makes the quoted number look about half the true cost.
Why does the true rate come out so much higher?
Because on average you only owe about half the loan across its life, but flat interest is charged on all of it. Charging 12% on twice the money is roughly the same as charging 21% on the real balance.
Who quotes flat rates?
Vehicle and motorbike finance, hire-purchase shops, some cooperatives and microfinance. Banks usually quote reducing. Always ask which.
Is a flat-rate loan a scam?
No — it is a legal way of quoting, and the paperwork usually says so. It is just easy to mistake for a bank rate. This page exists so it is not.
Do you keep what I type here?
No. The figures are used to work out the answer and are not stored, and never appear in the page address.
These are estimates. The figures depend entirely on the numbers you enter and on assumptions that are listed on every result. They are not financial advice, and a bank, employer or authority may use different rules. Check anything important with them before you decide.
We do not keep your figures. Salary, debt and savings you type here are used to work out the answer and are not stored, and never appear in the page address. The only thing remembered is your country and language choice (a small cookie), so the currency can be suggested next time — never a figure you typed. Anonymous counters record that a calculation happened, not what it was.