The 30-second version
The same loan, two framings — always compare the reducing rate.
There are two ways to charge interest on a loan. A reducing-balance rate charges interest only on what you still owe — so as you repay, the interest shrinks. A flat rate charges interest on the full loan amount for the entire tenure, even in the final year when you've repaid most of it. Same loan, same monthly payment — but the flat number looks much smaller on the quotation.
Worked example: Rs. 3,000,000 at 12% flat, 5 years
| Quoted flat rate | 12% per year |
| Monthly installment | Rs. 80,000 |
| Total interest over 5 years | Rs. 1,800,000 |
| True reducing-balance rate | 20.31% per year |
That "12%" costs you Rs. 1.8 million in interest — identical to a loan priced honestly at 20.31% reducing. The monthly payment doesn't change; only your understanding of the price does.
Why dealers quote the flat rate
Because 12 looks smaller than 20. It's not fraud — it's framing. Every dealer does it, which means every quotation you receive is framed the same way, and the only way to compare two offers fairly is to convert both to their true reducing rates first.
Three questions to ask before you sign
- "What is the reducing-balance (effective) rate?" If they can't or won't answer, that's information.
- "What is the total interest over the full tenure?" This single number defeats all framing — compare it across offers.
- "Is there an early-settlement penalty?" Some leases punish you for repaying early. Know the cost before you need it.
How to compare two offers in one minute
Take each dealer's quote — loan amount, flat rate, tenure — and run it through the lease calculator. It shows the true reducing rate beside the flat quote, plus exactly how much extra interest the flat framing costs you versus an honestly-priced loan. The lower true rate wins, regardless of which flat number looked cheaper.