For example: For loan amount 500000 for 5 years at the rate of 12% (reducing interest rate), EMI is 11,122.22 per month Here 12% reducing is equivalent to flat 6.69% per annum or flat 0.55% per month.

Test link: http://www.kountmoney.com/flat-reducing-interest-calculator.html

So, how to find flat rate of interest per annum and month if we have given reducing rate of interest or loan amount and tenure?

  • You need to explain what the rules are when for the "reducing interest rate" actually reduces and what it reduce to. – Dilip Sarwate Feb 8 at 10:54

I believe "reducing interest rate" is a poor choice of words here. I think what it's referring to is an amortized loan where the interest is calculated based on the remaining principal, not the original loan amount. You always pay 1% per month (12%/12 months) of the remaining balance, but the interest "rate" as a percentage of the original balance declines.

If you calculate the total amount paid (11,122 * 5 years * 12), you get 667,333. Subtract that from the original amount and you see that a total of 167,333 in interest is paid, which equates to 33% of the original loan balance, or 6.69% per year, or 0.56% per month.

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