Interest refers to the additional amount paid to the lender over and above the principal loan amount. Banks typically calculate loan interest rates similarly. Displayed as a percentage of the loan, this rate is calculated annually and is also known as the Annual Percentage Rate (APR). Each EMI includes portions for both the principal and the loan interest. Early EMIs usually have a higher interest portion that decreases over time.

Conversely, the principal component of EMIs is smaller initially and grows over time. Various methods exist to calculate interest rates, and understanding these can help secure the lowest personal loan interest rates.

The interest calculation depends on whether it is based on the original principal or the remaining balance. The distinction between flat interest rates and reducing balance rates is outlined below.

Flat Interest Rate

A Flat Interest Rate remains constant throughout the loan term. Interest is calculated on the total loan amount at the start of the tenure. Financial institutions determine the repayment schedule and EMIs, ensuring fixed repayment obligations. Flat interest rates are typically higher than reducing rates.

Reducing Interest Rate

Reducing interest rates are calculated on the remaining loan principal. A portion of each EMI repays the principal, and the interest is recalculated based on the reduced principal balance, rather than the original loan amount.

Differences Between Flat and Reducing Interest Rates

Key differences include:

1. Calculation Basis: Reducing rates are based on the outstanding loan balance, while flat rates calculate interest on the total sanctioned principal.
2. Comparison Rate: Flat rates are usually higher compared to reducing interest rates.
3. Interest Rate Impact: Flat rate calculations lead to higher effective interest rates, while reducing rates initially reflect lower rates.
4. Complexity: Flat rate calculations are simpler compared to reducing rate calculations.

Flat Interest Rate Calculator

Flat Interest Rate loans calculate interest on the initial principal for the entire loan term.

Calculation Formula

Principal (P)

Annual Interest Rate (I) – as a percentage

Tenure (T) – in years

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

Total Repayment Amount = P + Total Interest

Monthly EMI = Total Repayment Amount / (T * 12)

Reducing Interest Rate Calculator

Reducing Balance Interest Rate loans compute interest on the remaining principal.

Formula: EMI = [P × I × (1 + I)^T] / [(1 + I)^T - 1]

Where:

• P = Principal amount
• I = Interest rate / (100 × 12)
• T = Loan tenure in months

Total Interest = (EMI × T) – P

Total Repayment Amount = EMI × T

Flat vs Reducing Rate Calculator

This tool helps compare flat and reducing interest rate methods to identify the best option for your needs. It also highlights differences in total interest paid.

How to Use IPOtank Flat vs Reducing Interest Rate Calculator

To use the calculator:

Step 1: Input the principal loan amount.

Step 2: Provide the tenure and interest rate details.

Step 3: Click ‘Calculate’ to view interest payable and total loan outgo.

Advantages of the Flat vs Reducing Rate Calculator

• Accessible anytime, anywhere online.
• Quick and accurate interest calculations.
• Eliminates the need for manual calculations.
• Helps assess overall loan costs effortlessly.
• Useful for planning loans efficiently.
• Allows for easy comparison of flat and reducing rate methods.