The flat rate trap — why your car loan costs more than you think
A 10% flat rate is actually closer to 18.7% reducing balance. Here's the math every car buyer should know before signing.
When a car salesperson says "we'll do this at 10% interest," ask one question: Is that flat rate or reducing balance?
If they say flat rate — and most car loans are — the real cost is almost double what they quoted.
The math
Flat rate: interest is calculated on the original principal for every year of the loan, regardless of how much you've paid back. So ₹5 lakh at 10% flat for 3 years = ₹1.5 lakh total interest = ₹18,056 EMI.
Reducing balance: interest is calculated only on the outstanding balance, which falls every month as you pay. The same ₹5 lakh at 10% reducing for 3 years = ₹16,134 EMI — and your effective cost is around 10%.
The effective APR of a 10% flat rate loan? 18.7%.
How to check
Open EMI Planner, select Car loan, switch the toggle to Flat Rate, enter your numbers. It shows you the effective APR immediately. Know the real number before you sign.