Sri Lanka Leasing Calculator (Flat Rate vs Reducing Balance)
Sri Lanka's leasing market commonly uses two methods: flat-rate and reducing-balance. The flat rate calculates interest on the original principal for the full term; the reducing-balance method charges interest only on the outstanding principal. This calculator shows both side by side so you can understand the true cost.
This calculator provides estimates for general informational purposes only and does not constitute financial advice. Consult a qualified financial professional before making any financial decisions.
How It Works
Flat-rate method: Interest is calculated on the original loan amount for the entire term. Monthly payment = (Principal + (Principal × Rate × Years)) / Months. This appears simple but you are paying interest on the full amount even as you pay it down — effectively a much higher true rate.
Reducing-balance method: Interest is charged only on the outstanding balance each month. This is the standard EMI formula: P × r(1+r)^n / ((1+r)^n − 1), where r = annual_rate / 12 / 100.
Example (LKR 1,500,000 at 10% for 3 years / 36 months):
Flat rate: Interest = 1,500,000 × 10% × 3 = LKR 450,000; Total = LKR 1,950,000; Monthly = LKR 54,167
Reducing balance: Monthly EMI ≈ LKR 48,389; Total ≈ LKR 1,742,004; Interest ≈ LKR 242,004
The flat-rate loan costs nearly LKR 208,000 more in this example, even though the stated rate is the same. The effective annual rate of a flat-rate loan is roughly double the stated rate.
Rule of thumb: Multiply the flat rate by approximately 1.8–1.9 to get the equivalent reducing-balance rate.
Frequently Asked Questions
Which method is better?
The reducing-balance method is cheaper for the borrower. Banks in Sri Lanka often quote rates using the reducing-balance basis (similar to standard EMI), while some leasing companies and hire-purchase agreements use the flat-rate basis. Always ask which method is being used before signing.
Why does the flat rate result in more interest?
Under flat-rate, you pay interest on the full original amount for the entire term, even though your outstanding balance decreases as you repay. Under reducing balance, interest shrinks each month as your balance falls. The result is that a flat-rate loan effectively carries a much higher interest rate than stated.
How do I convert a flat rate to an equivalent reducing-balance rate?
A rough rule is to multiply the flat rate by 1.8–1.9 to get the approximate reducing-balance equivalent. For example, 10% flat ≈ 18–19% reducing balance. This calculator shows both total interest figures which gives you a direct comparison.
What is hire purchase?
Hire purchase (HP) is a form of leasing common in Sri Lanka for vehicles. You pay a deposit, then monthly instalments, and ownership transfers to you when the final payment is made. HP agreements in Sri Lanka historically used flat-rate calculations, though this varies by lender.
Does this calculator account for insurance or processing fees?
No. This calculator shows the pure financing cost only. Leasing agreements typically include compulsory comprehensive insurance premiums, stamp duty, and processing fees on top of the principal and interest. Get a full breakdown from your lender.