Flat vs reducing interest rate.

Flat interest is charged on the full original loan amount for the entire tenure, even as you repay. Reducing-balance interest is charged only on the outstanding principal, which falls with every EMI. On a ₹5,00,000 loan at a quoted 10% for 5 years, flat interest costs ₹2,50,000 while reducing-balance costs ₹1,37,411 — a difference of ₹1,12,589.

A rough rule: effective reducing rate ≈ flat rate × 1.75 to 1.9 (for typical 3–5 year tenures). Precisely, a 10% flat rate on a 5-year loan equals about 17.3% reducing-balance — because you keep paying interest on money you have already returned. The longer the tenure, the worse the gap.

Flat rates are common on two-wheeler loans, used-car loans from dealers, gold loans, personal loans from some NBFCs, and informal lending. Bank home loans and most bank car loans use reducing-balance (that is what an EMI quote normally means). Regulation increasingly requires lenders to disclose the effective (APR/reducing) rate — always ask for it.

Compare them on the same basis first: multiply the flat rate by ~1.8 to approximate its reducing equivalent, then compare. A "7% flat" (~12.5–13% reducing) is worse than a 11% reducing-balance loan despite looking cheaper. The only honest comparison is total interest paid or APR — never the headline number.

Because the number looks smaller. A dealer quoting "10% flat" sounds cheaper than a bank quoting "14% reducing," yet the flat loan costs more. It is a framing tactic, not a different kind of cheap credit. Ask every lender the same question: "What is the total interest I will pay in rupees, and what is the APR?"