When you compare a flat interest rate and a reducing interest rate for a home loan, it can be confusing. Learning the difference between them is vital because it will determine how much interest you pay over time.
A better knowledge of this concept will help you choose the best home loan. It also helps you learn the basics of how you will pay for the loan if your finances change over time.
You should be familiar with the flat interest rate and the reducing interest rate. It will help you learn various disciplines under them and help you make better decisions.
Here are a few examples:
- If a loan has a flat interest rate, the principal amount is what the borrower pays interest on. Your interest doesn’t change during the entire course.
- Reducing interest rates means paying more than your loan was initially worth when you took it out. In other words, reducing rates means that it takes longer to pay off your debt and will result in higher monthly payments.
- If a loan has a reduced interest rate, the principal amount of your loan is higher than the outstanding loan amount. You can save money over time by paying off your loan faster.
- Reducing interest rates can also make loans more affordable by lowering monthly payments and allowing borrowers to repay their debts sooner.
A reduced interest rate reduces how much interest you pay over time.
The interest rate is the same, but you pay less each month.
You’re probably familiar with a percentage rate—like your mortgage or car loan payments—that tells you how much money you have to pay over time. But what if your lender gave you the option to reduce the amount they take from your paycheck (or bank account)? That would be good news!
Reducing interest rates are often referred to as “reduced monthly payment programs.” They allow borrowers to make lower payments on their loans until they reach their goal of paying off the balance in full. For example, if someone owes Rs. 10k at an interest rate of 8%, reducing their monthly payment by 10% would mean they only have Rs. 8k left before paying off their debt completely.
It’s best to get the loan that fits your situation.
Flat interest rate: A fixed interest rate that doesn’t change over the loan term. It is suitable for people unwilling to take any type of risk and who have a source to pay out their loans for some time.
Reducing Interest Rate: A reduction in your original flat interest rate after you’ve made all payments on time for a certain period (usually 1-3 years). This is a fairly good option with good economic conditions since it allows them to get a bonus for making payments at the right time.
The easiest way to calculate this is by using an amortisation table, which shows how much your monthly payment will be when multiplied by 30 or 36 months. You can use simple interest (or compounding) if you don’t have access to an amortisation table and instead use the formula.
How to choose between the two loan types.
A home loan has two different interest rates, flat and reducing. Choosing between them can be confusing, but each has pros and cons.
A flat interest rate is the same amount each month, regardless of how much you pay on your mortgage or refinance loan payments. So, if you have a Rs 100,000 mortgage with a 6% fixed rate, you will pay that amount each month for your loan (unless something changes).
A reducing interest rate is lower than the original amount due each month. For example: if someone takes out a Rs. 80k mortgage at 8%, they might only make payments equivalent to 80% of what they owe instead of making full payments based on 100% (Rs. 100k). This means they’re saving money over time by not paying off as much principal when compared with someone who makes full principal repayments every month.
Why is it important to understand them?
It is essential to understand these loans in a thorough way because once you are out in the market looking for loans, there will be different people who will like to sell you different loans without explaining the various details associated with them, which can put you in a difficult position since you are not aware of the type of rate you will be paying.
The majority of people looking for loans have no idea what a flat interest rate or a reduced interest rate are. It becomes hard for them to make sound financial decisions that fit their economic condition.
Knowing what you want is the best way to understand the difference between a flat and decreasing interest rate. If your goal is to pay off your loan as quickly as possible, then choosing a reduced interest rate makes sense.
However, if you’re planning on keeping up with payments on time every month, then go with a fixed-rate mortgage instead. With all these options available today, there are plenty of options for anyone looking for their next home loan. If you still have trouble understanding it, Piramal Finance has enough material to help you get a fixed-rate mortgage instead. With all these options available today, there are plenty of options for anyone looking for their next home loan. You can also use a loan EMI calculator to calculate your housing loans and determine which type of loan and interest rate is best for you.