At the time of taking an instant personal loan online, your consideration should be on the rate of interest. A rate of interest is something that can make your loan affordable as well as expensive. You need to make sure that you compare the two types of rate of interest like flat and reducing rate of interest, so that you know which one is good for you.
What is a flat rate of interest?
When you take a personal loan you will always find a flat rate of interest. This is a common method of interest calculation that’s traditionally applied to personal loans. It is also called a fixed or a flat personal loan interest rate. If you need to understand what a fixed rate of interest is, you have to know more about it and how it works on your personal loan. It is pretty straightforward and easy to understand. Here, the interest rate is calculated on the entire online personal loan amount that you have taken, it is mainly your principal loan amount. Every month, the principal is always considered for calculating interest. So, first, the total interest on your loan is calculated and added to your principal amount. Then, this amount is equally divided by your loan repayment tenure. So, your monthly EMI will remain the same, whether you are paying your second or the last EMI for the loan. The rate of interest will not be going down no matter what. No market changes or conditions can affect your rate of interest.
What is reducing the rate of interest?
This is a not so common, yet prevailing form of rate of interest that you will find when you take a personal. Under this method, the interest rate is reduced every month. When you pay your EMI the principal debt amount also reduces. It is calculated upon the outstanding principal, which also reduces every month. So when the EMI decreases every month, the rate of interest is charged on the decreasing principal loan amount. The EMI nor the rate of interest is fixed. With time and when you keep paying your EMI every month, both decrease the principal loan amount and the rate of interest. When you pay your monthly EMIs, you pay a part of it as interest, and the rest goes towards paying off your principal amount. This is how the principal amount reduces for the next month. The interest amount on the same will decrease as well. This will continue as you pay off your EMIs, and the interest amount will get less with every EMI. So when you are taking a reducing rate of interest you will not have a fixed rate and it will keep changing as you keep paying your loan.
Difference between a flat and reducing rate
- In the 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 a monthly basis in the reducing balance rate method.
- In a flat rate of interest, the rate of interest will always be the same for both the starting and end of tenure. You need to pay the same rate of interest that has been charged by your loan provider. On the other hand, if you see, in a reducing rate of interest you will find your EMI coming down and so will your rate of interest. When the EMI goes down as you keep paying the EMI, the principal loan amount will decrease and the rate of interest will also change, it is not fixed.
- Flat interest rates are generally lower than the reducing balance rate. The fixed rate is lower when you start and they are more affordable. For a reducing rate of interest, you will find that the rate of interest that you start your loan with will be very high.
- Calculating a flat interest rate is easier as compared to reducing the balance rate in which the calculations are quite tricky. Do not go for a reducing rate of interest if you are not much good at calculations and fluctuations. You will be good with a fixed and low rate of interest that is flat without any changes.
- When you take a flat rate of interest you can better manage your finances. When you know that this is your EMI for all the coming months or years you can better manage your finances and expenses. For a reducing rate of interest, you will not have a fixed EMI or a rate of interest that you can plan your finances in a definite manner. There will be changes and every month you will find a new EMI and this can be quite a burden.
- In all the above-mentioned terms, the reducing rate method is better than the flat rate method.
Wrapping up
Before you start your personal loan online apply process, you must compare the personal loan interest rate and the type of interest rate you will go for. Do not take an expensive instant personal loan online.
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