When a lender says “12% interest”, the number alone does not tell you what the loan costs. Three things decide that: how the rate is calculated, what fees sit on top of it, and how long you borrow for.
Flat rate vs reducing balance
A flat rate charges interest on the full original amount for the whole tenure, even as you repay. A reducing-balance rate charges interest only on what you still owe. Almost all bank and NBFC personal loans use reducing balance, and that is the rate you should compare. A 12% flat rate on a two-year loan works out to roughly 22% on a reducing-balance basis.
What APR adds
The Annual Percentage Rate includes the interest and the processing fee (with GST) spread over the tenure. It is the closest single number to the true cost. In our representative example, a ₹1,00,000 loan at 14% p.a. for 24 months with a 2% fee has an APR of about 17.7%.
Why your rate differs from the advertised one
- Credit score: 750+ usually gets the lowest band; below 650 often means a higher rate or a decline.
- Income and employer: salaried employees of large companies are priced lower than irregular income.
- Existing EMIs: a high share of income already committed raises your risk.
- Tenure: longer tenures lower the EMI but raise the total interest.
Before you accept an offer
Ask for the Key Fact Statement. It must show the APR, every fee and the total amount payable. Compare offers on APR and total payable, not on the headline rate.
Published 6 October 2026 · General information, not financial advice.