Flat Interest Rate vs. Reducing Interest Rate

 

Flat Interest Rate vs. Reducing Interest Rate

image

Flat Interest Rate

Flat interest rate, as the term implies, means an interest rate that is calculated on the full amount of the loan throughout its tenure without considering that monthly EMIs gradually reduce the principal amount. As a result, the Effective Interest Rate is noticeably higher than the nominal Flat Rate quoted in the beginning. The formula of calculating fixed rate of interest is –

Interest Payable per Instalment = (Original Loan Amount * No. of Years * Interest Rate p.a.) / Number of Instalments

For example,

If you take a loan of Rs 1, 00,000 with a flat rate of interest of 10% p.a. for 5 years, then you would pay:

·         Rs 20,000 (principal repayment @ 1, 00,000 / 5) + Rs 10,000 (interest @10% of 1, 00,000) = Rs 30,000 every year or Rs 2,500 per month.

·         Over the entire period, you would actually be paying Rs. 1, 50,000 (2,500 * 12* 5). Therefore, in this example, the monthly EMI of Rs. 2,500 converts to an Effective Interest Rate of 17.27% p.a.

  Reducing / Diminishing Interest Rate

Reducing/ Diminishing balance rate, as the term suggests, means an interest rate that is calculated every month on the outstanding loan amount. In this method, the EMI includes interest payable for the outstanding loan amount for the month in addition to the principal repayment. After every EMI payment, the outstanding loan amount gets reduced. Therefore, the interest for the next month is calculated only on the outstanding loan amount. The formula for calculating reducing balance interest is –

Interest Payable per Installment = Interest Rate per Installment * Remaining Loan Amount

For example,

If you take a loan of Rs 1, 00,000 with a reducing rate of interest of 10% p.a. for 5 years, then your EMI amount would reduce with every repayment. In the first year, you would pay Rs 10, 000 as interest; in the second year you would pay Rs. 8,000 on a reduced principal of Rs. 80,000 and so on, till the last year, you would pay only Rs. 2,000 as interest. Unlike the fixed rate method, you would end up paying Rs. 1.3 lakh instead of Rs. 1.5 lakh.

Difference between Flat Interest Rate and Reducing Balance Rate

§  In flat rate method, the interest rate is calculated on the principal amount of the loan. On the other hand, the interest rate is calculated only on the outstanding loan amount on monthly basis in the reducing balance rate method.

§  Flat interest rates are generally lower than the reducing balance rate.

§  Calculating flat interest rate is easier as compared to reducing balance rate in which the calculations are quite tricky.

§  In practical terms, the reducing rate method is better than the flat rate method.

Comparison between Flat and Reducing Rate of Interest

image

You can apply for an attractive offer with best possible Rate of Interest and Terms for Personal Loan, Business Loan, Home Loan and Car Refinance Loan.

FundsTiger is an Online Lending Marketplace where you can avail fast and easy Home, Business and Personal Loans via 40+ Banks and NBFCs at best possible rates. We will also help you to improve your Credit Score. We have dedicated Relationship Managers who assist you at every step of the process. We can also help you in Balance Transfers that will help you reduce your Interest Outgo

Comments

Post a Comment

Popular posts from this blog

Financial Advice for Newly Married Couples

Image
Financial Advice for Newly Married Couples https://www.fundstiger.com/financial-advice-newly-married-couples/ Marriage is not only sharing the home! In all form of marriage, the couple promises to share happiness, sorrows, and responsibilities. But sharing financial life is always left behind and no one talks about it. Sharing finances between couples is a very important thing and has equal importance as that of sharing happiness and responsibilities. The following tips would help the newlywed couples to manage their finances 1. Discuss your Current Financial Situation Sit down together and discuss where you are in your finances currently.  Your individual and collective spending habits, personal debt, things you want to enjoy or purchase in the future (individually and collectively).  Also, discuss what you cannot go without. Take the time to speak and discuss your desires, dreams, and needs, even if at this stage they don’t seem to be heading in the same dire...
Read more

Household Money Saving Tips

Image
Household Money Saving Tips https://www.fundstiger.com/household-money-saving-tips/ Taking care of a family is hard enough, but managing the finances can seem next to impossible. Not only do you want to give them everything you can, but you also want to do it all. Someone who manages their finances responsibly has peace of mind and knows how to: Pay their living expenses Keep debts to a manageable level Save for the extras that make life enjoyable Avoid constant money anxiety Here are 10 ways to create and manage a budget that you can stick to that provides your family with what they need. 1. Set Budget Budgets can be tricky, so set one that you can be comfortable with. Take your new knowledge from tracking your spending habits and map out expense categories such as rent, utilities, entertainment and groceries. Look for areas where you think you could possibly cut back to increase the amount of money going into investments and/or savings. 2. Track your Spending Habits ...
Read more

Who qualifies for Personal Loans?

Image
Who qualifies for Personal Loans? https://www.fundstiger.com/personal-loans-qualification/ A  personal loan  is an unsecured advance offered by both banks and NBFCs to any eligible individual. Personal Loans for Salaried class include people working in private or government enterprises and does Salaried Doctors working in health institutions, CAs working in companies, employees of Public listed and Private limited companies , MNCs, SMEs and Government Sector employees including public sector undertakings. Each bank has separate minimum criteria for income, age, employment type, credit score, job status, etc. You will need to meet these criteria in order to qualify for a personal loan. Personal Loan Eligibility 1. Minimum and Maximum Age The minimum age for getting a loan is 21 Years whereas the maximum is 60 Years. 2. Net Monthly Income For salaried individuals, timely and regular salary credit is important to get eligible for loan. Min. Rs. 20,000 3. E...
Read more