Flat vs Reducing Rate Calculator US
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 principal 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 close to 1.7–1.9 times the equivalent reducing-balance rate over a typical loan term.
Which type of interest 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?
Convert both to the same basis — ideally the effective annual rate (APR) — rather than comparing a flat rate directly with a reducing-balance rate.
Which loans use which method?
Mortgages and most bank loans use reducing balance; some personal and vehicle loans are advertised on a flat rate.
Flat rate vs reducing balance
The two methods price loan interest very differently. A flat rate charges interest on the full original loan amount for the entire term, regardless of how much you have repaid. A reducing-balance (declining) 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 paid back, its true cost is higher than the quoted number suggests. As a rough guide, a flat rate of around 10% works out close to a 17–19% reducing-balance rate over a typical term — so the headline figures 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. On the same loan at 10% reducing balance, you pay interest only on the falling balance, so total interest is closer to $550 — because most of the principal is repaid well before year-end.
How to compare fairly
Always convert quotes to the same basis before comparing, ideally the effective annual rate (APR) on a reducing-balance basis. Standard mortgages and most bank loans use reducing balance, while some personal and vehicle loans are quoted flat — making them look cheaper than they are.
Results are estimates for general guidance in United States and may not reflect the latest local rates, fees or rules. Check official sources before making decisions.