A flat interest rate is the interest rate calculated on the full loan amount throughout the loan tenure without considering the monthly EMIs that reduce the loan amount with every repayment.
Here’s an example to help you understand how the flat interest rate works for a principal loan amount of ₹ 100,000 with a yearly interest rate of 10%.
In reducing interest rates, the interest is calculated on the outstanding amount that keeps reducing with every monthly repayment. This means that the EMI is calculated every month taking into consideration both the interest on the outstanding loan amount and the principal.
Now let’s look at the same example, but this time with a reducing interest rate.