Flat vs Reducing rate: While taking home loan or other loans, you must have noticed that at many places there is a flat interest rate and at other places there is a reducing rate. When you take a home loan, you repay it in equal monthly installments, known as EMIs. This includes both principal and interest. Interest is calculated using either the flat rate or reducing balancing rate method. To know how your lender is charging you interest, you should know the difference between these two interest rates. Let us know.
What is flat rate?
Flat interest rate on a loan means that the interest is calculated on the entire loan amount for the entire loan tenure. This means that the interest rate will remain the same throughout the loan tenure. In this you have to pay a fixed amount every month as EMI.
How is the calculation done?
In this, your interest is calculated by the (P * I * T)/100 formula. Here P represents the principal amount, I represents the annual interest rate and T represents the tenure. You can also calculate interest here through online calculator.
What is reducing rate?
In reducing rate, interest is calculated on the remaining portion of the loan after each repayment. This means that the interest rate decreases with time. As your loan is repaid, the interest rate decreases.
How is the calculation done?
This is a slightly complex calculation. Reduced interest = Monthly EMI x T – P. EMI formula here [P x I x (1+I) ^T], [((1+I)^T) -1)] Is.
Here P = principal, I = interest rate / (100×12) and T = number of years x 12. You can also calculate interest here through online calculator.
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