You need ₹5 lakh. One lender offers 10% flat. Another offers 12% reducing. Ten is lower than twelve, so the first one looks cheaper. It is not, and by a wide margin.
Personal loans are simple once you know three things: how the rate is calculated, what the fees add, and where to find the number that includes everything. This guide covers all three.
Reducing rate vs flat rate
With a reducing (or reducing-balance) rate, interest is charged each month only on what you still owe. As you repay, the balance falls and so does the interest. This is how banks normally quote personal loans, and it is what EMI calculators assume.
With a flat rate, interest is charged on the full original amount for the whole term, even though you are paying it back every month. That makes a flat rate far more expensive than the same number as a reducing rate.
The same ₹5 lakh, two ways
| ₹5 lakh for 3 years | 12% reducing | 10% flat |
|---|---|---|
| Monthly EMI | ₹16,607 | ₹18,056 |
| Total interest | ₹97,858 | ₹1,50,000 |
| What the rate really is, as a reducing rate | 12% | about 17.9% |
The “10% flat” loan costs about ₹52,000 more, and works out to nearly 18% a year once you convert it. We worked this out with the same maths as SkyloFin’s personal loan EMI calculator. Whenever a rate is quoted, ask: is it flat or reducing?
The processing fee is part of the cost
Most lenders charge a processing fee, often a percentage of the loan, with 18% GST on top. It is usually deducted from the amount you receive, so you get less money but repay the full loan.
Take the 12% reducing loan above with a 2% processing fee: ₹10,000 plus ₹1,800 GST = ₹11,800. You receive ₹4,88,200 but repay EMIs on ₹5,00,000. That pushes the real yearly cost from 12% to about 13.7%.
Other charges to check: prepayment or foreclosure charges, late payment fees, and charges for bouncing an EMI.
APR: the number that includes everything
The Reserve Bank of India requires lenders to give you a Key Fact Statement (KFS) before you sign a retail loan. It sets out the loan’s main terms in a standard format, including the Annual Percentage Rate (APR): the yearly cost of the loan including interest and charges such as the processing fee.
The APR is the best single number for comparing two loans. If one lender’s APR is 13.7% and another’s is 15%, the first is cheaper, whatever their headline rates say. Ask for the KFS and compare APRs before you accept an offer.
How to compare two personal loan offers
- Ask whether the rate is flat or reducing.
- Ask for the Key Fact Statement and note the APR.
- Note the processing fee and whether it is deducted from what you receive.
- Check the prepayment and foreclosure charges, in case you want to close early.
- Work out the EMI and make sure it fits comfortably in your monthly budget.
- Compare total repayment, not just the EMI. A longer tenure lowers the EMI but raises total interest.
How lenders decide your rate
Two people can get very different rates from the same lender on the same day. Lenders usually look at:
- Your credit score and history. A long record of on-time payments usually means a lower rate.
- Your income and employer. A stable salary, and sometimes the company you work for, affect both the rate and how much you can borrow.
- Your existing EMIs. Lenders check how much of your income already goes to repayments. A high share can mean a higher rate or a smaller loan.
- The amount and tenure. Terms can change with the size and length of the loan.
Each loan application you submit is usually recorded as an enquiry on your credit report, and many applications in a short time can lower your score. Checking offers that do not need a full application, or checking your own score, does not have that effect.
Cheaper ways to borrow, if you have them
A personal loan is unsecured, which is why it costs more than loans backed by something you own. If you have an asset, a secured loan is often cheaper: a loan against a fixed deposit, a gold loan, or a top-up on an existing home loan. Each has its own risks and terms, such as the asset being held until you repay, so compare the APR and the conditions, not just the rate.
Before you take a personal loan
- Borrow only what you need. A pre-approved offer for more is not a reason to take more.
- Check your credit score first. A better score usually means a better rate.
- Use it to replace costlier debt, not add to it. Moving a credit card balance at around 40% a year to a personal loan at a lower APR can save a lot, if you stop using the card for new debt.
- Borrow from regulated lenders. Check that an app or lender is a bank or an RBI-registered NBFC, or partners with one, before sharing documents.
Compare rates from lenders we list on personal loans, or try the loan finder, which ranks offers by interest rate.
Frequently asked questions
What is the difference between flat and reducing interest?
A flat rate charges interest on the full original amount for the whole term. A reducing rate charges interest only on what you still owe. A flat rate costs much more than the same number as a reducing rate.
What is APR on a loan?
The Annual Percentage Rate is the yearly cost of the loan including interest and charges like the processing fee. It is shown on the Key Fact Statement and is the best number for comparing loans.
Is the processing fee refundable?
Usually not, even if you close the loan early. It is normally deducted from the amount you receive, with 18% GST on top.
Can I close a personal loan early?
Usually yes, but lenders may charge a foreclosure fee. It is listed in the Key Fact Statement and the loan agreement.
This is general information, not financial advice. The rates and fee in this guide are examples; each lender’s offer and Key Fact Statement apply.
