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Sri Lanka Flat Rate to Reducing Balance Interest Calculator

Sri Lankan leases and loans are advertised on a flat (add-on) rate that sounds low. This tool converts that flat rate into the true reducing-balance and effective annual rate — so you can compare a leasing offer against a bank loan on equal terms. Works both ways. No signup, sources cited.

By Induwara AshinsanaUpdated Jun 29, 2026
Flat ↔ reducing convertervehicle leases & loans
CBSL method · 2026

Enter the flat (add-on) rate the lender advertised. We solve for the true reducing-balance rate.

Rs
%

Equal monthly instalments. Maximum 50 years (600 months).

Try an example

Advertised (flat)

12%

per annum

converts to

Actually (reducing)

20.31%

22.31% effective (EAR)

Monthly instalment
Rs 106,667
Total interest
Rs 2,400,000
Total payable
Rs 6,400,000
Effective annual rate
22.31%
Reducing nominal: 20.31%

How the balance reduces

MonthOpeningInterestPrincipalInstalment
1Rs 4,000,000Rs 67,700Rs 38,967Rs 106,667
2Rs 3,961,033Rs 67,040Rs 39,626Rs 106,667
3Rs 3,921,407Rs 66,370Rs 40,297Rs 106,667
⋯
60Rs 104,891Rs 1,775Rs 104,891Rs 106,667

Interest each month = outstanding balance × monthly rate (1.69%). The final instalment clears the remaining balance exactly.

Interest-only conversion — fees, insurance, VAT and early-settlement charges are excluded. Method follows the Central Bank of Sri Lanka's flat vs reducing-balance explanation and standard amortisation mathematics.

How it works

Two lenders can quote the “same” interest rate and charge you wildly different amounts, because they are measuring it differently. The Central Bank of Sri Lanka explains the two methods in its guidance for non-bank financial institutions, using a Rs 100,000 loan at 10% for one year: the flat method charges Rs 10,000 interest, while the reducing-balance method charges noticeably less, because interest is only ever calculated on what you still owe.

Let P be the principal, n the number of monthly instalments, f the annual flat rate and r the monthly reducing rate.

  1. Flat instalment. Under the flat (add-on) method, interest is charged on the full original principal for the whole term: interest = P × f × (n / 12). Total payable is P + interest, and the instalment is that total divided by n.
  2. Solve for the reducing rate. The reducing-balance instalment is the standard amortisation formula EMI = P × r × (1 + r)^n / ((1 + r)^n − 1). We find the r that makes this equal to the flat instalment. There is no closed form, so the tool solves it numerically by bisection (the instalment rises smoothly with r, so it always converges) to a tolerance of 1e-10.
  3. Report the rates. The reducing nominal annual rate is r × 12, and the effective annual rate (EAR), which accounts for monthly compounding, is (1 + r)^12 − 1.

Going the other way (reducing → flat) needs no iteration: set r = rate / 12, compute the reducing instalment, multiply by n for total payable, subtract the principal for total interest, then back out the flat rate as f = interest / (P × n / 12). As a sanity check the solver is compared against the textbook approximation r ≈ f × 2n / (n + 1), which is close for short terms but drifts on long ones — so the exact numerical solution is what the tool reports.

Worked examples

Personal loan — matches the CBSL example

Rs 100,000 · 10% flat · 12 months

  1. Flat interest: 100,000 × 0.10 × (12/12) = Rs 10,000
  2. Total payable: 100,000 + 10,000 = Rs 110,000
  3. Monthly instalment: 110,000 ÷ 12 = Rs 9,166.67
  4. Solve for r so the reducing EMI also equals 9,166.67 → r ≈ 0.014977/mo
  5. Reducing nominal: 0.014977 × 12 = 17.97% p.a.
  6. Effective rate: (1.014977)^12 − 1 = 19.53%
  7. Takeaway: a “10% flat” loan is really about 18% reducing.

Vehicle lease

Rs 4,000,000 · 12% flat · 5 years (60 months)

  1. Flat interest: 4,000,000 × 0.12 × 5 = Rs 2,400,000
  2. Total payable: 4,000,000 + 2,400,000 = Rs 6,400,000
  3. Monthly instalment: 6,400,000 ÷ 60 = Rs 106,666.67
  4. Solve for r → r ≈ 0.016925/mo
  5. Reducing nominal: 0.016925 × 12 = 20.31% p.a.
  6. Effective rate: (1.016925)^12 − 1 = 22.31%
  7. Takeaway: “12% flat” on a car lease ≈ 20% reducing — use that to compare a bank loan.

Edge case — single instalment (n = 1)

Rs 100,000 · 10% flat · 1 month

  1. Flat interest: 100,000 × 0.10 × (1/12) = Rs 833.33
  2. Total payable: Rs 100,833.33, paid in one instalment
  3. Reducing EMI for n = 1 is P × (1 + r), so r = 0.008333/mo
  4. Reducing nominal: 0.008333 × 12 = 10.00% p.a.
  5. With one payment, the flat and reducing nominal rates are equal — the classic identity that confirms the maths.

Frequently asked questions

Sources & references

The flat and reducing-balance methods were last cross-checked against the CBSL guidance on 2026-06-29. The conversion itself is standard amortisation mathematics and does not change with regulation.

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Comments & feedback

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