What is the difference between flat rate and reduced rate?

There are two ways to calculate interest on loans: flat rate and reduced rate. When there is a Flat rate, there are consistent equal monthly installments (EMIs) but a higher effective interest rate because the interest is computed on the initial principal amount throughout the loan term. On the other hand, a Reduced rate is more suited for long-term loans such as mortgages since it computes interest on the declining outstanding balance, which eventually results in reduced total interest payments.

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About Flat rate vs Reduced rate

The terms "flat rate" and "reduced rate" usually refer to interest calculation methods used for loans or mortgages:

Flat Rate:

• Calculation: Interest is calculated on the original principal amount throughout the loan tenure, regardless of the outstanding balance.
• EMI: Equated Monthly Installments (EMIs) remain constant throughout the loan tenure.
• Effective Interest Rate: The effective interest rate is higher than the advertised flat rate, as you continue paying interest on the full principal even as you repay the loan.
• Suitable for: Short-term loans or when the advertised flat rate is considerably lower than the equivalent reducing rate.

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Reduced Rate: 

• Calculation: Interest is calculated on the outstanding loan balance, which decreases with each repayment. 
• EMI: While EMIs may initially be higher, they gradually decrease as the outstanding balance reduces. 
• Effective Interest Rate: The effective interest rate is lower than the advertised rate, as you pay less interest over time. 

Suitable for: Long-term loans like mortgages, as it generally results in lower overall interest payments.