Two loans can advertise "12% interest" and cost you very different amounts. The trick is in how the interest is calculated. Here's how to see through it.
How an EMI is built
An EMI (Equated Monthly Instalment) is a fixed monthly payment covering both principal and interest. Early EMIs are mostly interest; later ones are mostly principal. This is called amortisation.
Flat rate vs reducing balance — the big one
- Reducing (diminishing) balance: interest is charged only on the outstanding principal, which falls every month. This is the fair, standard method for most retail loans.
- Flat rate: interest is charged on the full original principal for the entire tenure — even though you're paying the principal down. A flat rate looks lower but is far costlier.
As a rule of thumb, a flat rate is roughly 1.7–1.9× the equivalent reducing rate. So a "quoted" flat 12% can behave like a reducing ~21–22%. Always ask: "Is that flat or reducing?"
If a lender quotes a flat rate, ask them to restate it as a reducing-balance rate — or better, ask for the APR.
APR — the one number to compare
The Annual Percentage Rate folds interest and mandatory fees into a single annualised cost. RBI's Key Fact Statement mandates disclosing APR precisely so borrowers can compare offers fairly. When two offers differ, compare their APR and total repayable, not the marketing rate.
A worked intuition
On a ₹1,00,000 loan for 12 months:
- At a reducing rate, interest is charged on a balance that shrinks each month — you pay interest on far less than ₹1,00,000 on average.
- At the same number as a flat rate, you pay interest on the full ₹1,00,000 all year. The rupee cost is much higher.
The EMIs may look similar month to month, but the total interest differs sharply.
What to actually do
- Ask whether the rate is flat or reducing.
- Get the APR and the total amount repayable.
- Compare offers on those two figures.
- Remember: a longer tenure lowers the EMI but increases total interest.
Understanding this protects you more than any negotiation. A platform like IndiaCard exists to surface these numbers clearly, so you compare like-for-like across lenders instead of being anchored to a headline rate.