Two loans can both be advertised at "10%" and still cost very different amounts. The difference is how the interest is calculated: on a flat basis or on a reducing balance basis.
Flat interest
With a flat rate, interest is charged on the original loan amount for the entire tenure — even though you repay part of the principal every month.
Example: ₹1,00,000 for 12 months at 10% flat.
- Interest = ₹1,00,000 × 10% × 1 year = ₹10,000
- Total payable = ₹1,10,000
- EMI = ₹9,167
Reducing balance interest
With a reducing balance rate, interest is charged each month only on the principal still outstanding. As you repay, the interest portion of each EMI shrinks.
Same loan: ₹1,00,000 for 12 months at 10% reducing.
- EMI = ₹8,792
- Total interest = about ₹5,499
- Total payable = about ₹1,05,499
The real difference
The flat-rate loan costs nearly twice the interest. In fact, a 10% flat rate over one year works out to roughly 18% on a reducing balance basis. The longer the tenure, the wider that gap.
How to protect yourself
- Ask which method is used. Most bank and NBFC personal, home and business loans use reducing balance. Flat rates still appear in some vehicle, consumer durable and informal loans.
- Check the Key Fact Statement (KFS). RBI requires lenders to give you a KFS with the Annual Percentage Rate (APR) — the all-in yearly cost including fees. Compare APRs, not headline rates.
- Compare total payable. It is the one number that captures rate, method and fees together.
Every offer on PaisaFin is shown with its EMI, processing fee and total payable, so you can understand the terms before choosing.
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