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Personal Loan

What is a flat interest rate?

Key Takeaways

  • Interest is charged on the entire principal amount over the entire loan term in flat rates, which results in greater expense.
  • The reducing balance interest rate charges interest on the outstanding principal amount, making it a cost-effective option.
  • Flat-rate loans are more suitable for short-term borrowing while reducing balance loans are more suitable for long-term loans.
21 May 2025 by Team FinFIRST
Flat Interest Rate
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While borrowing a loan, a thorough understanding of interest rate charges is crucial to know the total payable amount. Flat interest rate is one such approach where interest is levied on the entire loan amount for the total loan term. Although this approach provides fixed EMIs, it tends to yield a greater total interest outgo than a reducing balance interest rate.

If you are thinking of a personal loan, understanding how these calculations are done can assist you in making a financially wise choice.

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What is a flat interest rate and how does it work?
 

A flat interest rate applies a fixed percentage of interest on the total loan amount throughout the loan tenure, irrespective of how much has already been repaid.

Formula for flat interest calculation
 

Total interest = (Loan amount X Flat interest rate X Tenure in years)

EMI = (Loan amount + Total interest) / Loan tenure in months

Since interest is charged on the original principal and does not decrease with repayments, the overall interest paid is significantly higher than that of a reducing balance interest loan.

Flat interest rate vs reducing balance interest rate
 

Feature

Flat interest rate

Reducing balance interest rate

Interest calculation

On the full principal for the entire tenure

On the remaining balance after every EMI payment

Total interest paid

Higher

Lower

EMI amount

Fixed for the entire tenure

Decreases over time

Best suited for

Short-term loans

Long-term loans


Example:
 

A ₹ 5 lakhs loan with a 10% flat interest rate for 5 years will have ₹ 2.5 lakhs as interest.

The same loan with a reducing balance will also have a much lower interest rate, as it is charged just on the falling principal after each EMI.

The right loan isn’t just about the interest rate – it’s about the total cost. Choosing wisely can save you more than you think.

Advantages and disadvantages of flat interest rate loans
 

Like two sides of a coin, flat interest rate loans have their own set of advantages and disadvantages.

Advantages
 

  • Fixed EMIs: Comfortable for planning, as monthly repayments are same.
  • Easy to calculate: Overall interest is set so anyone can comprehend easily.
  • Lower interest rate on paper: The rate quoted is lower than in reducing balance rates, but the overall interest paid is more.

Disadvantages
 

  • Higher interest paid: More interest is paid by the borrower over the loan period.
  • Not ideal for long-term loans: Since more interest amount is paid, it becomes costly for long repayment periods.

When is a flat interest rate loan appropriate?
 

A flat interest rate loan is a suitable choice if:

  • You require short-term credit (e.g. car loans).
  • You like fixed EMIs for improved financial planning.
  • The lender gives you a significantly lower flat rate than reducing balance rates.

Why should you choose FIRSTmoney for your personal loan?
 

If you are seeking a convenient and hassle-free personal loan, FIRSTmoney provides competitive interest rates of 10.99% p.a., with loan sizes between ₹ 50,000 and ₹ 10 lakhs. For convenient financial planning, the borrower can choose between 9 to 60 months as the repayment tenure. The digital loan application process provides quick approvals and disbursals, making borrowing easy. Zero foreclosure charges also allow you to repay the loan on time without additional fees, providing you with higher financial freedom.


Conclusion
 

Fixed interest rates look attractive because they have a fixed EMI, but they incur more overall interest. A reducing balance rate of interest, such as that provided by FIRSTmoney, is the better choice for long-term loans. Make sure you carefully compare repayment features while choosing a loan to make an informed financial decision.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirstbank.com for latest updates.

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