Two loan offers can both say "12% interest" and still cost very different amounts. The difference is whether the rate is flat or reducing. Understanding this one detail protects you from one of the most common surprises in borrowing.
Reducing-balance rate
With a reducing-balance rate, interest each month is charged only on the amount you still owe. As you repay principal through your EMIs, the interest part keeps falling. Most bank and NBFC personal and business loans in India use this method, and the standard EMI formula is based on it.
Flat rate
With a flat rate, interest is worked out on the full original loan amount for the whole tenure, even though you are paying the loan down every month. The total interest is simply:
Because you keep paying interest on money you have already repaid, a flat rate is more expensive than a reducing rate of the same number.
The same loan, both ways
Take ₹5,00,000 for 3 years at 12% — flat versus reducing (illustrative rates):
| Flat 12% | Reducing 12% | |
|---|---|---|
| Total interest | ₹1,80,000 | about ₹97,858 |
| Monthly EMI | about ₹18,889 | about ₹16,607 |
| Total repaid | ₹6,80,000 | about ₹5,97,858 |
The flat-rate loan costs about ₹82,000 more. In fact, a flat rate of 12% over 3 years works out to roughly the same EMI as a reducing rate of about 21%. That is the number you should compare.
How to compare offers correctly
- Ask which method is used. If an offer just says "1% per month" or "12% p.a.", ask whether that is flat or reducing.
- Compare the EMI and total repayment, not the headline rate. Put both offers into an EMI calculator using the reducing method.
- Look at the APR in the Key Fact Statement. The RBI requires lenders to show an Annual Percentage Rate that includes interest and fees, so two offers can be compared on the same basis. See what the KFS includes.
- Check fees separately — processing fee, GST, prepayment charges.
Fixed vs floating is a different question
Don't confuse flat/reducing with fixed/floating:
- Fixed rate stays the same for the whole tenure. Most personal loans are fixed.
- Floating rate moves with a benchmark such as the lender's external benchmark rate. Common for home loans and some business loans.
A loan can be fixed and reducing (the usual personal loan), or floating and reducing. The flat method is the one to watch out for.
Compare EMIs for different rates and tenures in our personal loan EMI calculator.
This guide is general information, not financial advice. Interest rates, fees, eligibility and other terms are set by each lender and can change; the figures in examples are illustrative only. Oxon Fintech is a loan facilitation platform, not a lender — loans are sanctioned and disbursed by our lending partners.