What is flat rate of interest?
Flat rate of interest is a way in which banks or NBFCs will calculate your loan repayment. Under the flat rate system your EMI will be calculated without taking into account any periodic payments made by you. So interest on your loan will be charged on the full loan amount throughout the loan tenure. EMI contains repayment made towards both interest and principal amount but a flat rate of interest calculations does not take that into account. An interest on reducing balance on the other hand is calculated as per your outstanding amount and not the original loan.
Flat interest rate is the interest rate calculated on the entire loan amount during its entire tenure. However, this does not take into consideration the gradual reduction of the principal amount by monthly EMIs. This is why the Effective Rate of Interest is higher than the Flat Interest Rate that was quoted at the time of the loan sanction.
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