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A Flat interest rate is calculated on the full loan amount throughout its tenure. It does not take into account that the principal amount is gradually reduced by the monthly EMIs.

An interest rate that is calculated on the outstanding loan amount every month is known as the Reducing Balance interest rate.

If you take a Loan of 5 Lakhs, @10% Flat Rate for a Period of 5 years. Then you would pay EMI of rs. 12,500 for 5 Years.

This EMI of rs. 12,500 converts to a Reducing Balance Interest Rate of 17.27% for the same Tenor.

It does not make sense to keep paying the same EMI through the entire tenure of the Loan even though the loan amount keeps reducing.

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