A 9% flat rate is not 9%. On an ₹8,00,000 car loan over five years, a "9% flat" quote gives an EMI of ₹19,333 and ₹3,60,000 of total interest — the same as a reducing-balance loan at 15.71%. That 15.71% is the number to put next to a bank's personal loan or a top-up on your home loan, because most mainstream Indian loans are quoted on a reducing balance.
Why the two rates are so far apart
A reducing-balance loan charges interest only on what you still owe, so the interest shrinks every month as you repay. A flat-rate loan charges interest on the original amount for the entire tenure, no matter how much you have already paid back. On this loan the EMI splits the same way in every single month: ₹13,333 of principal (₹8,00,000 ÷ 60) and ₹6,000 of interest (₹3,60,000 ÷ 60). By the start of the final year you have repaid ₹6,40,000 and owe ₹1,60,000 — and you are still charged ₹6,000 that month, the same as in month one.
What it costs on ₹8 lakh over five years
- Quoted at 9% flat: EMI ₹19,333, total interest ₹3,60,000, total repaid ₹11,60,000
- A genuine 9% reducing balance: EMI ₹16,607, total interest ₹1,96,401, total repaid ₹9,96,401
- The flat quote's effective reducing-balance rate: 15.71%
- What the flat quote costs extra: ₹1,63,599, or about ₹2,727 more every month
That ₹1,63,599 is over 20% of the amount you borrowed, paid purely because of how the rate was written down. The car, the tenure and your credit profile are identical in both rows — only the arithmetic changed.
There is no single multiplier
People often say a flat rate is "about double". Run the conversion across flat quotes from 6% to 14%, over tenures of one to seven years, and the effective reducing rate lands at roughly 1.6 to 1.85 times the flat number — with the multiple easing down as the tenure stretches past two or three years. ₹5,00,000 at 10% flat over 5 years is 17.27%. ₹1,50,000 at 12% flat over 3 years is 21.20%. The loan amount makes no difference to the multiple — only the rate and the tenure do. Because it turns on the tenure, the only reliable conversion is to solve for the reducing rate whose EMI matches the flat EMI.
One honest limit: this converts the interest quote and nothing else. Real offers add processing fees, documentation charges and sometimes bundled insurance, so your true cost sits above the effective rate shown here — the RBI's APR is meant to include those, this conversion is not. And a flat quote is not automatically a bad deal; if its effective rate still beats every alternative you can actually get, it can be the cheapest borrowing on the table. Convert first, then compare — run your own amount, rate and tenure through the flat vs reducing calculator.
Where to go next
FAQs
There is no fixed multiplier, because the answer depends on the tenure. The exact method is to find the reducing-balance rate whose EMI equals the flat-rate EMI. As a rough guide, across flat quotes of 6–14% over tenures of 1–7 years the effective rate lands at roughly 1.6 to 1.85 times the flat rate — but run your actual amount, rate and tenure through a calculator rather than relying on a rule of thumb.
Yes, quoting a flat rate is not prohibited. But since 1 October 2024 the RBI has required lenders to give retail and MSME term-loan borrowers a Key Facts Statement disclosing the loan's annual percentage rate, so the comparable number has to be shown to you before you sign. Ask for it if all you have been given is a flat figure.
Not the way it does on a reducing-balance loan, where a prepayment immediately cuts the balance interest is charged on. On a flat-rate contract the total interest is fixed at signing, so what you get back depends entirely on the foreclosure and rebate clause in your agreement — which may return only part of the unaccrued interest and add a foreclosure charge. Read that clause before assuming prepayment will help.
Educational information, not financial advice. Figures are illustrative and assume the stated return or rate; actual outcomes vary and aren't guaranteed. Run your own numbers before deciding.