Before comparing two loan rates, check how each lender calculates the interest.
What the Terms Say
A flat rate charges interest on the original loan amount for the full loan period. A reducing balance rate charges interest on what's still unpaid, which falls as you repay.
“Fixed” means the rate doesn't change during the agreed period. It doesn't tell you whether the calculation is flat or reducing.
Why It Matters
For the same loan and repayments, an 8% flat rate costs more than an 8% reducing balance rate. The lower-looking percentage isn't always the cheaper offer.
A Simple Example
Borrow ₹1 lakh for three years at 8% flat. Interest is ₹24,000, making total repayment ₹1.24 lakh. Over 36 monthly instalments, that's about ₹3,444 a month before fees. Those repayments are roughly equivalent to a 14.5% yearly reducing balance rate with monthly instalments.
Check Before You Agree
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Ask whether the quoted rate is flat or reducing.
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Compare the same loan amount and period using the repayment schedules.
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Ask for the Key Facts Statement, the lender's loan summary, and APR. APR shows the yearly borrowing cost including interest and loan charges.
Quick Takeaway
Compare the total cost, not just the advertised rate.