A flat interest rate is a type of interest calculated on the entire amount of a loan throughout its tenure. The interest rate or lending rate is fixed for the duration of the loan, and it will be calculated at the start of the loan tenure itself. Interest calculation under the flat rate is based on a simple formula:

• Interest accrual on each installment = (Loan principal x total loan tenor x interest rate per annum) / total number of installments

Flat interest rates are easy to calculate and track, require no calculations to blend principal and interest into a level payment, and keep loan commitments clear, transparent, and easily tracked by both parties). However, they are usually higher compared to reducing interest rates.

In contrast, reducing interest rates are calculated on the diminishing principal amount, meaning that every month when a borrower pays their EMI, their principal loan amount decreases. Interest is calculated only on the reduced principal amount at the time of EMI payment. This method of calculation results in a lower interest amount payable by the borrower.

In summary, a flat interest rate is a simple method of calculating the total cost of credit if all payments are made on time, but it can cost much more than a declining balance method.