How this calculation works
Flat interest is calculated on the original amount for the full term. Reducing-balance interest uses each month’s remaining principal. The equivalent rate is solved from the present value of the flat payments.
Flat interest = original principal × rate × months/1200; reducing interest follows the outstanding balanceA worked example
At a quoted 12% for one year, ₹1,00,000 flat interest is ₹12,000, so the installment is ₹9,333.33. A 12% nominal reducing-balance schedule has payment about ₹8,884.88.
Good to know
The implied rate excludes all fees and is not a legally defined APR disclosure. Payments are monthly in arrears; fees, insurance, withheld amounts, tax and lender rounding are excluded. Read actual cost and cash-flow disclosures before comparing offers.
Reference: OpenStax: fixed-payment loan amortization (opens in a new tab) ↗
The same percentage can describe different bases
A flat rate charges interest on the original principal for the full term. A reducing rate charges against each month’s outstanding balance. At the same quoted annual percentage, the flat convention generally produces a larger total interest charge for an amortizing loan.
At 12% flat for twelve months, ₹1,00,000 incurs ₹12,000 interest. Its monthly installment is ₹9,333.33. At 12% nominal reducing balance, the fixed monthly installment is about ₹8,884.88 under the entered timing assumptions.
The effective annual rate calculator distinguishes a periodic rate from its annual compounded equivalent; both differ from an all-in credit disclosure that includes other charges.
An implied rate translates the payment stream
The implied monthly reducing rate is the one whose discounted flat installments equal the original principal. Multiplying that monthly rate by twelve gives the nominal annual equivalent; compounding it over twelve months gives the effective annual equivalent.
The effective annual rate calculator explains the second conversion. The loan payment budget calculator instead works backward from a payment budget and a stated reducing rate to a supported principal.
A no-fee equivalent is not an APR disclosure
Fees deducted from the amount disbursed, insurance charges and other credit costs can change an all-in borrowing rate. This page excludes them and labels its rate as a mathematical equivalent, rather than claiming to reproduce a lender’s disclosure.
Compare actual cash received, every required payment and their timing. Equal quoted rates, or equal installment amounts with different terms, do not by themselves establish equal borrowing cost.
A few questions, answered
Why is the equivalent reducing rate above the flat quote?
The flat payments include interest charged on principal that is gradually being repaid.
Does this calculate a legally defined APR?
No. It solves a no-fee equal-month payment-stream rate.
What happens at a zero quoted rate?
Both conventions charge zero interest and divide principal equally across the term.