Opt For Reducing Balance Loan Rate Which Is Cheaper Than Flat Interest Rate
By at January 16, 2010 | 12:00 am | Print
Almost every second person take a loan for different purpose but selecting right loan is quite difficult for layman. Sometimes we got good financial planner to help us out and sometimes we venture ourselves and fell into expensive loaning bracket which is not good for us. Solving this problem,I”ll explain you how to check loan details and whether that loan is good for you or not.
Check loan details and whether that loan is good for you or not:
In general if you take a loan from any bank then they will calculate interest rates in either at a flat rate or at a reducing balance rate.
Now let us examine which is right for us.First you know how flat rate works.Flat rate, the interest rates are calculated keeping the outstanding amount in mind and it will be constant throughout the loan tenure .
However , reducing balance loan ‘s interest rate will be not constant and it will calculated on a time to time basis based on the reducing outstanding loan amount.
At prima facie it looks and you yourself can understand which loan could be more beneficial for you. Let me give you some examples, suppose you have taken a 10 Lakh loan at a flat interest rate of 13% ,now lets compare same amount of loan which is taken by some other person but on reducing balance loan 13.25 but after calculating its EMI I find reducing loan EMI is lesser while its interest looks higher .
You can easily calculate the total amount of interest that you will pay for each offer by multiplying your EMI into the number of monthly installments and subtracting the loan amount from this figure. You can then easily identify which loan is the most cost effective for you.
You will wondered knowing this but you can check with your respective banks then you will find that despite higher looking interest rate as i mentioned in earlier paragraph of reducing loan rate, its EMI will be lesser than flat interest rate loan.Banks generally mention an annual interest rate, but always check its details interest rates can be deceptive unless untill you know full details of it how it works. Remember to account for any upfront fees for example processing fee while comparing two loans.