A flat interest rate implies that the interest is computed on the total original principal amount, irrespective of the progressive monthly reductions in the outstanding balance. This contrasts with diminishing balance interest rates, where the interest is based on the residual loan amount. For instance, if a loan of Rs. 100,000 is availed at a flat interest rate of 10% annually for 3 years, the yearly interest remains Rs. 10,000, independent of repayments.