Flat charges you for money you already paid back.
A reducing balance rate charges interest only on what you still owe. A flat rate ignores your repayments and charges on the full loan every year. Same headline number, very different bill.
| Same 600000 . 5 years |
Flat 10 pct |
Reducing 10 pct |
| EMI every month | 15000 | 12748 |
| Interest over 5 years | 300000 | 165000 |
| The rate you actually pay | 17.3 pct | 10.0 pct |
Both loans advertise ten percent on the same six lakh. The flat one keeps charging interest on the whole 600000 every year, even in year five when it is nearly paid off. That is why flat 10 costs about 135000 more and works out to roughly 17.3. Quick tell, a flat rate runs close to 1.8 times its real reducing balance cost.