This blog provides you with a detailed comparison on different types of Interest rates. Read More to find out
What is Flat Rate of Interest?
Literally Flat means your interest rate on the borrowed loan is FLAT throughout the tenure of the Loan. Let me give you an example. You borrow 1 lac as personal loan for 2 years period at 10% FLAT rate. What does this mean? You pay 10% interest on 1 lac which is 10000/- for first year and 10000/- again for the second year. The interest rate is FLAT throughout the period and the interest portion is same for all the years. In the above example you paid 20000/- as interest for 2 years.
What is Diminishing Rate or Reducing Rate?
Diminishing or reducing rate means the interest component reduces every month as per the outstanding principal. The outstanding principal is reduced every month from your payment of EMI and interest is calculated on the outstanding principal only in case of Reducing rate or diminishing rate. Hence your interest is reducing as the principal amount keeps reducing. Below mentioned example for the same 1 lac is given below. The total interest outflow is only 10,747/- only for 2 years in flat rate of interest you pay 20000/-.
Example: Loan Amount: 1 Lakh, Rate -10% Reducing and Tenure – 2 Years.
| No. | Monthly Payment | Interest Amount | Principal | Balance |
|---|---|---|---|---|
| 1. | 4614.49 | 833.33 | 3781.16 | 96218.84 |
| 2. | 4614.49 | 801.82 | 3812.67 | 92406.18 |
| 3. | 4614.49 | 770.05 | 3844.44 | 88561.74 |
| 4. | 4614.49 | 738.01 | 3876.48 | 84685.26 |
| 5. | 4614.49 | 705.71 | 3908.78 | 80776.48 |
| 6. | 4614.49 | 673.14 | 3941.35 | 76835.13 |
| 7. | 4614.49 | 640.29 | 3974.20 | 72860.93 |
| 8. | 4614.49 | 607.17 | 4007.32 | 68853.62 |
| 9. | 4614.49 | 573.78 | 4040.71 | 64812.91 |
| 10. | 4614.49 | 540.11 | 4074.38 | 60738.53 |
| 11. | 4614.49 | 506.15 | 4108.34 | 56630.19 |
| 12. | 4614.49 | 471.92 | 4142.57 | 52487.62 |
| 13. | 4614.49 | 437.40 | 4177.09 | 48310.53 |
| 14. | 4614.49 | 402.59 | 4211.90 | 44098.62 |
| 15. | 4614.49 | 367.49 | 4247 | 39851.62 |
| 16. | 4614.49 | 332.1 | 4282.39 | 35569.23 |
| 17. | 4614.49 | 296.41 | 4318.08 | 31251.15 |
| 18. | 4614.49 | 260.43 | 4354.06 | 26897.08 |
| 19. | 4614.49 | 224.14 | 4390.35 | 22506.74 |
| 20. | 4614.49 | 187.56 | 4426.93 | 18079.8 |
| 21. | 4614.49 | 150.67 | 4463.82 | 13615.98 |
| 22. | 4614.49 | 113.47 | 4501.02 | 9114.95 |
| 23. | 4614.49 | 75.96 | 4538.53 | 4576.42 |
| 24. | 4614.49 | 38.14 | 4576.35 | 0 |
Conclusion
The interest you pay on flat rate for 2 years on 1 lac is 20000/- whereas in a reducing or diminishing rate it is only 10747/-. You almost save 9253/- as interest savings in a diminishing rate in comparison to FLAT rate. Whenever you take a loan, please ask your banker or NBFC what type of rate is the loan provided -FLAT RATE or DIMINISHING /REDUCING RATE