Flat interest rates and reducing interest rates serve as two unique approaches to calculating interest on a loan. When using the flat rate of interest, the calculation of interest is performed on the entire loan throughout the loan period. Note that the interest amount stays constant all through the loan period. Every instalment payment incorporates a portion of the principal amount and the fixed interest. This flat interest rate method is easier but can be costly over time since it doesn’t consider the gradually decreasing principal amount as you gradually repay the loan.

The reducing rate of interest calculates interest only on the remaining principal amount. It is calculated at the end of each period, usually monthly. The principal amount reduces as you pay off the loan; the interest charged on it also reduces simultaneously. This method can lead to reduced total interest payments throughout the loan tenure, unlike a flat interest rate.

Typically, a flat rate of interest is higher than reducing rate of interest. It is commonly used by vehicle finance firms. Understanding the flat vs reducing interest rate calculator helps you to make a choice effectively. The choice between these two methods can considerably impact the overall sum of interest to be paid. Hence, it is vital to understand both these concepts when you are taking a loan.

The choice between flat and reducing interest rates can significantly affect the total amount of interest you pay, so it’s important to understand these concepts when considering a loan.

Formula for Flat and Reducing Interest Rates Calculation

The formulas help you to better understand the flat vs reducing interest rate calculator.

Here’s the formula to calculate a flat interest rate:

Total Interest = (P * I * T)/100

where, 

• P is the Principal amount
• I show the annual interest rate (in percentage)
• T is tenure (in years)

Total amount repayable = P + (P * I * T) /100

Monthly EMI = ( P + (P *I* T)/100) / T*12  

To calculate a reduced interest rate, you need the EMI amount, which is calculated as follows.

EMI = [P x Ix (1+I) ^T]/ [((1+I) ^T)-1)]

where,

• P denotes the principal amount
• I denote the rate of interest / (100×12)
• T denotes the number of years x 12

The formula to calculate the reduced interest rate is as follows:

Reduced interest rate = Monthly EMI x T – P

Example of Flat and Reducing Interest Rates

The following example helps you comprehensively understand the flat vs reducing interest rate calculator.

Suppose you have borrowed INR 10,000 at a 10% interest rate for 5 years. With a flat interest rate approach, you would pay interest on the whole principal amount (i.e. INR 10,000) for all 5 years.

If you use a reducing interest rate approach, you would pay 10% interest on the reduced balance every year. As you gradually pay off the principal amount, the interest for the succeeding years is calculated on a reduced amount.

How Does the Flat vs Reducing Interest Rates Calculator Work?

The flat vs reducing interest rates calculator serves as a financial tool to compare the total interest to be paid on loans provided at flat interest rates vs reducing interest rates. It aims to assist borrowers in understanding the effect of various interest rate structures on the total borrowing cost over the loan period.

In the flat vs reducing interest rate calculator, users need to fill in the loan details like the loan amount, loan tenure and interest rate. After inputting these details, the calculator calculates the total interest to be paid for both reducing and flat interest rates. Consequently, borrowers can effectively compare the total borrowing cost under each method.

How to Use ClearTax Flat vs Reducing Interest Rates Calculator?

You can follow the below steps to use the ClearTax flat vs reducing interest rates calculator:

• Step 1: Choose the Calculation type- Flat interest rate or Reducing interest rate .
• Step 2: Specify the loan details, like the rate of interest, the principal amount and the loan period.
• Step 3: Click on “Calculate EMI”, after which the calculator will show the total interest to be paid, monthly EMI and the total amount for each of the interest rates.

This tool lets you compare the total interest you need to pay under each structure (reducing interest rate and flat interest rate). So you can assess the viability of various loan options.

Benefits of Flat vs Reducing Interest Rates Calculator

Understanding the benefits helps you to better assess the difference between flat vs reducing interest rate calculator. Here are the benefits:

• It is an easily accessible online tool that you can use anytime, anywhere.
• It swiftly calculates the interest payable by you on your loans.
• It saves you energy and time that would be otherwise spent on manual calculations.
• It helps you evaluate the total cost of your loan.
• You only need to input the basic details of your loan to calculate the interest rate.
• It helps you to effectively compare the two widely used interest calculation methods and determine the difference in the amount of payable interest. Transparent comparisons help loan borrowers assess the cost-effectiveness of various loan options.
• It helps loan borrowers understand the financial consequences of reducing and flat interest rates on the total borrowing cost. Hence, they can wisely choose the most appropriate loan option as per their financial situations and preferences.
• It lets borrowers recognise the potential cost savings and opt for the loan option that offers beneficial terms and conditions.