Home loan Or while taking another loan, you must have heard words like ‘flat interest rate’ and ‘Redusing rate’. You repay the home loan in the same monthly installments (EMI), which includes both principal and interest. Interest is calculated from one of these two methods. It is important to know at what rate your bank is charging interest from you, so that you can take the right decision. Let’s understand both of them.
What is a flat rate?
Flat interest rate means that the interest on your loan will be counted on the entire original loan amount for the entire loan period. In this, the interest rate remains the same during the entire period and you have to pay a certain EMI every month. The flat rate is calculated by a simple formula:
Interest = (Principal × annual interest rate × period) / 100
You can also easily remove it from online calculator.
What is a reduction rate?
Every time you repay EMI in a reducing rate, interest is calculated on the remaining part of your loan. This means that as you pay the loan, your principal decreases and the interest on it also decreases. Its calculation is slightly complicated, because after every EMI, interest varies with low principal.
Reduceed interest = monthly EMI × Total duration (in months) – Principal
EMI’s formula is:
EMI = [P × I × (1+I) ^T] , [((1+I)^T) -1)]
Here:
P = principal
I = interest rate / (100 × 12) (monthly interest rate)
T = years number × 12 (total duration in months)
You can also calculate interest on it using online calculator.
Which rate is more beneficial
At the flat rate you pay interest on the entire original amount for the entire duration, even if you have repaid some amount. At the same time, you only pay interest on the rest of the principal in the reducing rate, which reduces your total interest liability over time. Therefore, selecting a ridusing rate loan is more beneficial.
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