Flat Rate Vs Reducing Rate – Which is Better?

 

Flat Rate Vs Reducing Rate – Which is Better?

When you will go to the bank for personal loan, your bank/lender will ask you for two types of rate – Flat rate or reducing rate. In fac, your lender will advise you to go for flat rate and also tell you the advantages of flat rate interest loans.

But well, this is not the truth. You should not go for flat rate. This is because reducing rate is much better than the flat rate. Let me explain you how. But before that you will have to understand the difference between flat rate and reducing rate.

What is Flat interest rate & What is Reducing rate interest rate?

In a flat rate loan, the rate is calculated on the principal amount of a loan, while in a reducing balance loan, interest rate is charged only on the outstanding amount of a loan on a periodic basis.

Let me explain you by giving you an example.

In case of flat rate, suppose if you take a loan on Rs.5 lakhs and pay Rs.20,000 as a first EMI than from second EMI also the interest rate will be calculated on entire 5 lakh.

While in case of reducing rate, if you take a loan on Rs.5 lakh and pay Rs.2,000 as a first EMI than from the second EMI the interest rate will be calculated and charged only on Rs.4.80 lakhs and so on. So when you are about to finish the loan say just Rs.50,000 are remaining, you will have to pay interest on just Rs.50,000.

While in case of flat rate even if just 50k is remaining, you will still pay interest on 5 lakh…!!!

So get financially educated and always choose reducing rate option when you borrow money.