Flat rate to effective interest rate calculator
Some lenders and dealers quote a flat rate. It sounds low but it is charged on the full original amount for the whole term, so the real rate is much higher. This calculator shows the real cost.
How to use this calculator
- Enter the loan amount.
- Enter the flat rate per year exactly as quoted.
- Enter the term in months.
- Read the effective rate and compare it with offers quoted as reducing-balance rates.
Worked examples
Example 1
₹1,00,000 at a flat 12% for 12 months.
You enter
| Loan amount | ₹1,00,000 |
|---|---|
| Flat interest rate (per year) | 12% |
| Term (months) | 12 |
You get
| Monthly instalment | ₹9,333 |
|---|---|
| Total interest | ₹12,000 |
| Effective rate (per year, nominal) | 21.46% |
| Effective annual rate (compounded) | 23.7% |
Example 2
₹3,00,000 at a flat 8% for 36 months.
You enter
| Loan amount | ₹3,00,000 |
|---|---|
| Flat interest rate (per year) | 8% |
| Term (months) | 36 |
You get
| Monthly instalment | ₹10,333 |
|---|---|
| Total interest | ₹72,000 |
| Effective rate (per year, nominal) | 14.55% |
| Effective annual rate (compounded) | 15.56% |
How it works
With a flat rate, interest = amount x rate x years, added once and split into equal instalments. But you repay part of the loan every month, so you are borrowing less each month while still paying interest on the original amount.
The effective rate is the monthly rate at which those instalments would exactly repay the loan, multiplied by 12. As a rule of thumb it is close to double the flat rate for short loans.
Formula
Instalment = (P + P x flat rate x years) / months. The effective monthly rate solves P = instalment x (1 - (1 + i)^-n) / i.
Common questions
Why is the effective rate so much higher?
Because the interest is not reduced as you repay the principal.
Which rate should I compare?
Compare the effective rate, or ask for the offer as a reducing-balance rate.
Is the effective annual rate different?
The compounded annual rate is slightly higher still; both are shown.
Learn more
Read the lesson Understanding and managing debt on pusaram.com for the ideas behind this calculator.
Calculators give estimates for learning and planning. They are not financial, tax, legal or medical advice, and results depend entirely on the numbers you enter. Check rates, limits and rules with an official source or a qualified professional before acting.