What is the difference between flat rate and reduced rate?

There are two ways to calculate interest on loans: flat rate and reduced rate. When there is a Flat rate, there are consistent equal monthly installments (EMIs) but a higher effective interest rate because the interest is computed on the initial principal amount throughout the loan term. On the other hand, a Reduced rate is more suited for long-term loans such as mortgages since it computes interest on the declining outstanding balance, which eventually results in reduced total interest payments. ALSO READ : Hidden cost & fees while buying a property in Dubai About Flat rate vs Reduced rate The terms "flat rate" and "reduced rate" usually refer to interest calculation methods used for loans or mortgages: Flat Rate: Calculation : Interest is calculated on the original principal amount throughout the loan tenure, regardless of the outstanding balance. EMI : Equated Monthly Installments (EMIs) remain constant throughout the loan tenure. Effective Interest Rate : The effective interest rate is higher than the advertised flat rate, as you continue paying interest on the full principal even as you repay the loan. Suitable for : Short-term loans or when the advertised flat rate is considerably lower than the equivalent reducing rate. Check out our Mortgage Calculator for Dubai , UAE Reduced Rate:  Calculation : Interest is calculated on the outstanding loan balance, which decreases with each repayment.  EMI : While EMIs may initially be higher, they gradually decrease as the outstanding balance reduces.  Effective Interest Rate : The effective interest rate is lower than the advertised rate, as you pay less interest over time.  Suitable for : Long-term loans like mortgages, as it generally results in lower overall interest payments.