Flat vs Reducing Balance Rate Calculator (Sri Lanka)
Convert any flat interest rate quoted by a Sri Lankan lessor or finance company into the true reducing-balance rate — the real cost of borrowing.
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Why the flat rate looks cheaper than it is
On a flat-rate loan, interest is calculated on the original loan amount for every month of the tenure. So on a Rs. 2M loan at 13% flat over 5 years, you pay Rs. 260,000 interest every year — even in year 5 when you have already repaid most of the capital. A lender quoting a reducing balance rate charges interest only on the outstanding balance, which is why the reducing-equivalent rate is nearly double the advertised flat rate.
Quick rule of thumb
For equal monthly repayments, the reducing-balance rate is roughly Flat × 1.85 for a 5-year loan and Flat × 1.75 for a 3-year loan. This calculator solves it exactly using the same IRR method lenders and regulators use to compute APR.
When you see a flat quote in Sri Lanka
Vehicle leasing, hire purchase, and some finance company personal loans still quote flat. Always convert before signing — a "12.5% flat" 5-year vehicle lease is really a ~23% reducing balance rate, more expensive than most personal loans from a bank.
Frequently Asked Questions
What is the difference between flat rate and reducing rate?
Flat rate charges interest on the original loan amount for the entire tenure, even after you repay part of the principal. Reducing balance charges interest only on the outstanding balance, which falls each month. A flat rate of 12% usually equals a reducing rate of around 22–24% — nearly double.
Why do Sri Lankan leasing companies quote flat rates?
Flat rates look cheaper. A leasing company advertising '13% flat' sounds better than '24% reducing', even though both cost the same. This is legal in Sri Lanka but you should always compare using the reducing balance (effective) rate — which is what most banks quote for personal loans and mortgages.
How do I convert flat rate to reducing balance rate?
The exact answer needs the loan tenure. A rough rule for equal-monthly-repayment loans: Reducing rate ≈ Flat rate × 2 × N / (N + 1), where N is the number of installments. Use this calculator for the exact figure — it solves the IRR/APR equation used by lenders and regulators.
Is flat rate ever cheaper?
No — for the same nominal rate, flat is always more expensive because you keep paying interest on money you have already repaid. If a lender quotes flat, always ask for the equivalent reducing/APR figure before signing.
Do banks in Sri Lanka use flat or reducing rate?
Commercial banks usually quote reducing balance rates for housing and personal loans. Finance companies and vehicle lessors more often quote flat rates. Always convert to reducing before comparing.
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