April 17, 2026
Two Rate Types, One Loan Why It Even Matters
When you apply for a personal loan the lender gives you an interest rate. Simple enough, right? Except here is the part nobody tells you upfront: two loans can carry the exact same interest rate on paper, and you can still end up paying very different amounts by the time you are done.That gap comes down to one thing whether your loan uses a fixed rate or a reducing balance rate. Get this wrong, and you could be paying thousands of rupees more than you needed to.
What Exactly Is a Fixed Rate of Interest?
With a fixed rate, interest is calculated on the full loan amount from day one. And it stays that way right through the last EMI.Here is a simple example. Say you borrow ₹2 lakh at 14% fixed for 2 years. The lender calculates 14% on ₹2 lakh every single year, for both years. It does not matter that you have already paid back half the principal by month 12. The base never changes.
Your EMI stays the same every month, which does make budgeting easy. But that predictability has a price you are paying interest on money you have already returned to the lender. That feels a bit unfair once you think about it.
And What Is the Reducing Balance Rate?
The reducing balance method is different, and in most cases, fairer.Here, interest is only charged on what you still owe. So if you borrowed ₹2 lakh and have paid back ₹50,000 so far, next month’s interest is calculated on ₹1.5 lakh not the original amount. Every month you pay, the interest portion of your EMI gets a little smaller.Most personal loan products today use this method. The problem is that lenders do not always say so clearly, and borrowers rarely think to ask.
The Real Cost Comparison (This Is the Part That Surprises Most People)
A 14% fixed rate and a 14% reducing rate sound identical. They are not.
On a ₹2 lakh personal loan over 2 years:
- Fixed rate at 14%: Total interest paid ≈ ₹56,000
- Reducing balance at 14%: Total interest paid ≈ ₹30,500
Same loan. Same tenure. Same number on the brochure. But one costs nearly double.
To put it another way a 14% fixed rate is actually closer to a reducing rate of 25–26% when you do the math properly. Most borrowers would never agree to that if it were written plainly. But because the rate looks the same, they sign without realising.
How Lenders Present These Rates and Where It Gets Confusing
Most banks and large NBFCs in India use the reducing balance method and quote it that way. But some lenders particularly smaller ones or those advertising “instant” or “easy” loans quote flat rates. Flat rates look lower. They are not cheaper.
If you are ever in doubt, just ask directly: “Is this a flat rate or a reducing balance rate?” A lender who cannot answer that clearly is not someone you want to borrow from.At Mr. Loanwala are making sure you know exactly what rate type you are looking at before anything is finalised. No vague answers, no fine print surprises.
So Which One Should You Go With?
If you have a choice and often you do the reducing balance rate will cost you less. The only real case for a fixed rate is if you want completely stable EMIs and that stability matters more to you than saving money.
For most people taking a personal loan for a wedding, a medical emergency, home renovation, or to clear other debts the reducing rate is the better deal. And the longer the loan tenure, the more that saving adds up.
One thing worth knowing: some lenders deliberately quote a lower flat rate to make their offer look attractive. Always run the numbers yourself, or use a loan EMI calculator before you commit. The headline rate is not the full picture.
The Bottom Line Before You Borrow
This does not have to be complicated. Fixed rate charges you interest on the full amount throughout. Reducing rate charges you only on what you still owe. Over any reasonable loan tenure, the reducing rate almost always works out cheaper.
Knowing which one your personal loan uses before you sign is one of the simplest ways to avoid overpaying. Mr. Loanwala is here to make sure you have that clarity from the start, not after the fact.
