Flat vs Reducing Rate Calculator UK
Compare EMI and total interest on a flat interest rate versus a reducing-balance rate.
How it works
Compound interest earns returns on both your original money and the returns already added. Adding a regular monthly contribution accelerates growth further over time.
A = P(1 + r/n)^(nt) + contributions compounded monthly- Longer time horizons benefit most from compounding
- More frequent compounding gives slightly higher growth
- The donut shows how much of your final balance is interest vs money you put in.
Frequently asked questions
What is the difference between flat and reducing-balance interest?
Flat rate charges interest on the full original amount the whole term; reducing balance charges only on the outstanding balance, which falls as you repay.
Why does a flat rate cost more than it looks?
Because it keeps charging interest on capital you have already repaid, so the effective rate is well above the quoted flat figure.
How do flat and reducing rates roughly compare?
As a rule of thumb, a flat rate is about 1.7–1.9 times the equivalent reducing-balance rate over a typical term.
Which is better for a borrower?
Reducing balance is generally cheaper for the same quoted rate, because interest is charged only on what you still owe.
How should I compare two loan offers?
Compare on the same basis — ideally the representative APR — rather than a flat rate against a reducing-balance rate.
Which loans use which method?
UK mortgages and mainstream loans use reducing balance; flat rates appear mainly in some specialist or overseas lending.
Flat rate vs reducing balance
The two methods price loan interest very differently. A flat rate charges interest on the full original amount for the whole term, no matter how much you have repaid. A reducing-balance rate charges interest only on the outstanding balance, which shrinks with every payment.
Why a flat rate costs more
Because a flat rate keeps charging on money you have already repaid, its true cost is higher than the headline figure. As a rough guide, a flat rate of around 10% is close to a 17–19% reducing-balance rate over a typical term — so the two are not comparable on their face.
Worked example
On a £10,000 one-year loan at a 10% flat rate, interest is a fixed £1,000. At 10% reducing balance, you pay interest only on the falling balance, so total interest is closer to £550, because most of the capital is repaid before year-end.
In the UK, mainstream loans and mortgages use reducing balance and quote a representative APR. Always compare on the same basis — ideally APR — rather than putting a flat rate next to a reducing-balance one.
Results are estimates for general guidance in United Kingdom and may not reflect the latest local rates, fees or rules. Check official sources before making decisions.