You are buying a vehicle. The bank quotes a loan at "24% per year." The leasing company quotes "14% flat." The lease sounds far cheaper — so why do experienced buyers hesitate? Because a flat rate and a reducing rate are not comparable numbers, and the flat one is hiding its true cost.
Reducing balance: interest on what you still owe
A reducing-balance loan (how banks quote most loans) charges interest only on the outstanding balance. As you repay, the balance falls, so the interest portion of each installment falls too. The quoted rate is the real rate.
Flat rate: interest on the full amount, forever
A flat rate (how most leasing is quoted) charges interest on the entire original amount for the whole term — even though you are steadily paying the principal down. You are paying interest on money you have already repaid.
The eye-opening comparison
Take a Rs 1,000,000 facility over 5 years:
- At 14% flat: total interest = 1,000,000 × 14% × 5 = Rs 700,000. Monthly installment ≈ Rs 28,333.
- That same monthly installment, worked backwards, is equivalent to a reducing-balance rate of about 23% per year.
So "14% flat" costs you roughly the same as a 23% reducing loan — not 14%. The headline number was never the real one.
How to compare honestly
- Always ask for the effective (reducing-balance) rate, or the Annual Percentage Rate (APR).
- Compare the total amount repayable and the monthly installment, not the quoted percentages.
- Watch for add-ons — insurance, documentation and early-settlement fees change the real cost.
Our Loan & Leasing Calculator does this for you: switch it to flat mode and it reveals the true effective rate behind any flat quote, plus the full repayment schedule.
The takeaway
Flat rates are not a scam — they are just quoted differently. But if you compare a flat rate against a reducing rate as if they were the same, you will almost always choose the more expensive option. Convert everything to the effective rate first, then decide.
General guidance only — always read your specific facility agreement.
