On a reducing balance loan — the standard for home, car and most personal loans — interest each month is charged only on the outstanding balance, which falls with every instalment. The EMI formula produces a level payment that clears the loan exactly at the end of the tenure.

On a flat rate loan, interest is calculated on the original amount for the full period regardless of repayments, so the same quoted rate costs substantially more.

Given: Loan ₹500,000, rate 10.5% p.a., 5 years, reducing balance

r = 10.5/12/100 = 0.00875  ·  n = 60  ·  (1+r)⁶⁰ = 1.68789

EMI = 500,000 × 0.00875 × 1.68789 / 0.68789 ≈ ₹10,747

Total payable = 10,747 × 60 ≈ ₹644,800 → total interest ≈ ₹144,800

The same loan on a flat 10.5% would cost ₹262,500 in interest — nearly ₹118,000 more.

• A flat rate always costs more than the same reducing-balance rate — roughly 1.8× on a 5-year loan.
• Processing fees, insurance and GST on charges are not included in the interest figure.
• Floating-rate loans reprice over time; the figures assume a constant rate.
• Prepayments reduce total interest sharply, especially in the early years.

Which type does my lender use?
Banks normally quote reducing balance; some NBFCs and dealer finance quote flat rates. Always ask.

Why is early-tenure interest so high?
Interest is charged on the outstanding balance, which is largest at the beginning.

Is this the same as an EMI calculator?
The EMI is shown here, but the focus is on the interest cost rather than the instalment.