AI-generated illustration
The three-point summary
- 1.5% × 12 is an 18% nominal annual rate, not every loan’s all-in cost.
- Flat and reducing-balance calculations produce different repayments despite the same monthly headline.
- Read net disbursal, repayment schedule, fees and disclosed APR together.
A loan offer says “only 1.5% a month”. The number looks small. But what balance does it apply to, for how long, and with which other charges? Without those answers, it cannot be fairly compared with another loan’s annual rate.
Why do both 18% and 19.56% appear?
Multiplying a 1.5% monthly periodic rate by 12 produces an 18% nominal annualised rate. The mathematical annual equivalent with monthly compounding is (1.015)12 − 1, approximately 19.56%.
These are different conventions. Do not call 19.56% the final APR or the actual rupee interest on every loan. Principal repayments may reduce the balance; upfront fees and payment dates can differ. Inspect the lender’s disclosed APR and calculation sheet separately.
₹1 lakh over twelve months: the basis matters
Assume two hypothetical loans. Both disburse the full ₹1 lakh, require twelve month-end payments, charge no fees or taxes and quote 1.5% monthly. Only the interest basis differs.
| Method | Monthly payment | Total repayment | Total interest |
|---|---|---|---|
| Reducing-balance EMI | ₹9,168 | ₹1,10,016 | ₹10,016 |
| Flat rate, equal principal instalments | ₹9,833.33 | ₹1,18,000 | ₹18,000 |
The reducing-balance formula is EMI = P × r × (1+r)n ÷ ((1+r)n − 1), where P is ₹1 lakh, r is 0.015 and n is 12. In the flat model, each month includes ₹1,500 interest on the original ₹1 lakh and ₹8,333.33 principal. Rounded payments may require a small final adjustment.
An 18% nominal reducing quote and an 18% annual flat quote are therefore not equivalent. Ask how the interest-bearing principal declines. A smaller EMI can also result from a longer tenure; it does not automatically mean lower total interest.
What happens when a fee is deducted?
Suppose another hypothetical offer sanctions ₹1 lakh but deducts ₹2,000 upfront. You receive ₹98,000 for use while repayments follow the loan schedule. Ignoring the deduction because it seems like a small processing charge understates the cost of borrowing. A fee paid separately is still your cash outflow.
If insurance or another service is bundled, ask whether it is optional or a lending condition, what benefit it provides and where the cost appears. Neither automatically accepting every bundle nor declaring every insurance charge illegitimate is a sound comparison.
What can the KFS tell you?
RBI’s NBFC Responsible Business Conduct directions, updated through 1 July 2026, provide for an APR computation and amortisation schedule in the KFS for new NBFC retail and MSME term loans sanctioned on or after 1 October 2024, including fresh loans to existing customers; credit-card receivables are excluded from this section. APR is defined to include interest and associated charges. Check the framework and documents applicable to your lender. Source: RBI definitions and paragraph 29.
Treat the KFS as a comparison document rather than merely a signature page. Reconcile the net amount, instalments, fixed or floating nature, charges and repayment schedule. If the sales message seems inconsistent, ask for a written explanation. The app presenting an offer and the actual bank or NBFC lender may have different names.
A practical comparison checklist
- How much usable money reaches my account?
- Is the rate monthly or annual, flat or reducing?
- How many instalments are due, and on which dates?
- What is included in APR, and which contingent charges are separate?
- What could change on prepayment, delayed payment or a rate reset?
- How would I repay during a weaker income month?
Compare offers over the same intended borrowing amount and tenure. If one loan funds a smaller usable amount after deductions, a lower displayed interest rate may not settle the comparison.
Frequently asked questions
Is 1.5% monthly always expensive?
The label alone is insufficient. Compare the loan type, risk, charges and alternatives. This article does not rank current market rates.
Is 19.56% the RBI APR?
No. Here it is the mathematical effective annual equivalent of a periodic rate. Check the loan-specific disclosed APR and methodology separately.
Does EMI multiplied by months give the whole cost?
It gives the instalment total. Upfront, separate and contingent charges may also matter. Include net disbursal and applicable fees in the comparison.
Takeaway
Turn the small monthly headline into a complete borrowing question: how much will you receive, and how much must you return, when? That is where a useful comparison begins.
Educational information, not personalised lending or legal advice. All example rates and amounts are hypothetical. Sources checked on 5 November 2026.
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