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What is the difference between a Flat interest rate and a Reducing Balance interest rate ?

April 26, 2017Balance difference flat Interest rate reducing

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What is the difference between a Flat interest rate and a Reducing Balance interest rate ?

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Take a simple example. Suppose you have taken a loan of Rs. 5 Lakh at 10% interest. You repay Rs. 25,000 in the first instalment. If the 10% interest continues to be applicable on Rs. 5 lakh after your first repayment, you are paying a “Flat Interest Rate”. But, if 10% interest is applicable now on Rs 4.75 Lakh, you are paying a “Reduced Balance Interest Rate”.