Flat vs Reducing Interest Rates

The difference between flat and reducing interest rates

Interest is the portion of the loan other than the principal that is returned to the lender. Interest rates on loans to individuals are also applied to various banks and NBFCs in a similar manner. The interest rate is usually described as a percentage of the loan, calculated once a year, also known as the annual percentage rate (APR). Each EMI repayment is partly included in the principal and partly in the interest on the personal loan. Each trade with the best personal loan interest rate has a higher interest rate component in the initial EMI, which decreases as the EMI progresses.

On the other hand, the principal-adjusted EMI is lower at the start of the EMI maturity and increases over the course of the term. There are many ways to calculate interest rates and you can get the lowest interest rate for an individual loan based on this method.

The first method is based on whether interest is calculated based on the original principal or the balance of the principal outstanding. The following divides the difference between a decrease in the equilibrium interest rate and the flat interest rate:

Flat rate

In this case, the interest rate for the individual loan is calculated based on the original principal, regardless of the principal repaid. This interesting calculation method results in higher EMIs. This can be better understood with the following example:

Let’s say you took rupees. $100,000 loans at 10% per annum. The annual percentage is $10,000 / -. So, if you want to repay the loan within 3 years, the principal and interest rate will be $100,000 / – + $30,000 / – that is, $ 1.30,000 / – which will be divided into 3 years, which in total complexity 1,30,000 / – divided by 36 months, the result is a $3612 per year. In the case of the balance reduction method, it is also $ 3227 / -. This is the best personal loan interest rate you can find in the case of quick loans from some private lenders.

Lower or reducing interest rates

In this case, the interest rate on an individual loan is calculated based on the outstanding principal at the end of the specified period. As mentioned above, each time the EMI is paid, a portion of it will be adjusted based on the principal amount, and the remainder will be used to pay interest. When calculating interest, the next calculation is the principal balance outstanding, not the initial principal amount. To understand this better, let’s take a look at the following example,

Let’s say your loan amount is $ 5, 00,000, the interest rate is 15%, which must be repaid within 5 years. In this case the EMI will be $11 895 / – per month. In the first year, the total EMI you paid is $ 1.42 740 out of which $ 72 596 / – interest and balance sheet $ 70,144 / – included in interest. Currently, the interest rate is calculated only in the amount of 15% of the principal amount of the balance that is 4.37.404 / -. If you can afford to pay a larger amount as an installment, using this method will lower the percentage you pay. Thus, through EMI, you can get the lowest interest rate for an individual loan.

Which is better?

When you are considering a loan, it is important to know whether the lender is using the reduced balance method or the flat rate method to calculate interest.

The fixed interest rate is usually lower than the declining balance sheet interest rate. It is easier to calculate a fixed interest rate than it is to calculate a lower book interest rate, which is quite difficult. In practical applications, the reduced rate method is better than the flat rate method.

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