Flat Interest Vs Reducing Balance: Don't harm yourself in pursuit of a cheap personal loan, understand this difference..

A personal loan is also called an emergency loan. Although nowadays there are many ways to raise funds in an emergency, personal loans are still very helpful on many occasions. A personal loan is an unsecured loan that does not require much hassle to take. But in return for this loan, banks charge a lot of interest from the customer. Most people know that personal loans are expensive.

Interest is collected on this loan in two ways, Flat Interest Rate and Reducing Balance Interest Rate. This is where the whole game of expensive and cheap happens. If you do not know the difference between flat interest rates and reducing balance, then you can make a wrong deal with personal loans and can harm yourself in the pursuit of cheap personal loans.

What is reducing interest rates?

The name of reducing the balance interest rate itself suggests that in this the customer has to pay interest only on the outstanding loan amount. This means that the interest to be paid every month is calculated based on the remaining loan, not on the actual loan. For example, if you have taken a loan of Rs 5 lakh at a rate of 16 percent for five years, then as the months pass, the EMI will also start decreasing.

What is the flat interest rate?

In a flat rate, the customer has to pay interest on the entire loan amount during the loan period. Suppose you have taken a loan of Rs 5 lakh at a flat rate of 10 percent for five years, then your EMI of Rs 4,167 per month is fixed, you will have to pay this EMI for the entire 5 years. Taking a loan to reduce the interest rate is cheaper than the flat interest rate.

This is how you suffer loss due to one decision

Many times non-banking finance companies (NBFCs) offer flat interest rates with low interest rates on personal loans. Whereas the interest rate of personal loans in banks can be a little higher, it is mostly on reducing interest rates. If the customer does not know the difference, he gets trapped in the trap of a cheap loan and takes a loan at a flat interest rate causing loss to himself.

Understand with an example
Suppose a bank offers you a personal loan of Rs 5 lakh at 15 percent interest. This is reducing balance interest and you take it for 5 years. At the same time, an NBFC offers a personal loan of Rs 5 lakh to someone known to you at 12 percent interest, but that is a flat interest rate. The repayment period for this is also 5 years.

In such a situation, if we calculate according to Flat vs Reducing Rate Calculator, then in reducing balance interest rates, the customer will have to pay Rs 7,13,698 in 5 years to repay a loan of Rs 5 lakh. In this, he will pay Rs 2,13,698 as interest. If a customer takes a loan for five years at a flat interest rate of 12 percent, he will have to pay Rs 8,00,000 for it. That means despite the low interest rate, he will pay Rs 3 lakh only on interest.