While purchasing a loan, you need to figure out about the principal, interest, as well as the tenure of the loan. Just like every bank offers loans at different interest rates, every bank offers loans at different types of interest rate. The two types of interest rates include flat interest rates and reducing interest rates. Before applying for a loan we should be well versed about what is flat interest rate and what is reducing interest rate.
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What is flat interest rate?
In simple words, the flat interest rate meaning is the amount calculated on the total principal amount. This rate is calculated based on the full loan amount and its tenure. In this method, you do not have to pay the principal amount as the tenure progresses. Here the repayment liability is fixed and consistent throughout the tenure. But the flat interest rate is slightly higher than the reducing interest rate.
To calculate the flat interest rate you can use the formula:
Interest payable for every month instalments= (Loan Principal x Total Loan Tenure x Interest rate per annum)/ Total amount of instalments.
What is reducing interest rate?
The interest rate calculated on the basis of outstanding principal is called reducing interest rate. The outstanding loan amount is the portion that remains in the loan. This concept was new to me so my bank manager explained this term. So, basically, the remaining amount that needs to be paid that you owe to the bank is called the outstanding loan amount.
The formula of reducing the interest rate is
Interest payable for every month instalments=( Loan principal Total x loan tenor x interest rate per annum) / total number of instalments.
Personally, I find it hard to grasp the concept of reducing interest rates. Since I understand simple calculations, I like to apply for flat interest rates rather than reducing interest rates.
This was all about what is flat interest rate in a nutshell.
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What is flat interest rate?
Damayanti Sengupta
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3 Year
2022-03-17T10:38:50+00:00 2022-03-17T10:38:52+00:00Comment
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