# whats the difference between flat interest rate vs reducing rate ?

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whats the difference between flat interest rate vs reducing rate ?
I am taking a loan of 2.44 lakh
he said the flat rate would be 12%
but while processing he is saying the reducing rate will be 21.5%

unable to understand
update- understood via google, at first it way difficult to but eventually I did

4 Dimers
Deal Subedar
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Reducing/ Diminishing balance rate, as the term suggests, means an interest rate that is calculated every month on the outstanding loan amount. In this method, the EMI includes interest payable for the outstanding loan amount for the month in addition to the principal repayment. After every EMI payment, the outstanding loan amount gets reduced. Therefore, the interest for the next month is calculated only on the outstanding loan amount. The formula for calculating reducing balance interest is –

Interest Payable per Installment = Interest Rate per Installment * Remaining Loan Amount

For example, if you take a loan of Rs 1, 00,000 with a reducing rate of interest of 10% p.a. for 5 years, then your EMI amount would reduce with every repayment. In the first year, you would pay Rs 10, 000 as interest; in the second year you would pay Rs. 8,000 on a reduced principal of Rs. 80,000 and so on, till the last year, you would pay only Rs. 2,000 as interest. Unlike the fixed rate method, you would end up paying Rs. 1.3 lakh instead of Rs. 1.5 lakh.

This method is particularly used to calculate the interest payable for housing, mortgage, property loans, overdraft facilities, and credit cards. In this method, you have to only pay interest on the outstanding loan amount. The interest rates quoted for such loans are the Effective Interest Rate, which is similar to the interest rates used for Fixed Deposits (FD) and Savings Accounts.

Deal Subedar
41
1471
15
HondaSimpson wrote:

Reducing/ Diminishing balance rate, as the term suggests, means an interest rate that is calculated every month on the outstanding loan amount. In this method, the EMI includes interest payable for the outstanding loan amount for the month in addition to the principal repayment. After every EMI payment, the outstanding loan amount gets reduced. Therefore, the interest for the next month is calculated only on the outstanding loan amount. The formula for calculating reducing balance interest is –

Interest Payable per Installment = Interest Rate per Installment * Remaining Loan Amount

For example, if you take a loan of Rs 1, 00,000 with a reducing rate of interest of 10% p.a. for 5 years, then your EMI amount would reduce with every repayment. In the first year, you would pay Rs 10, 000 as interest; in the second year you would pay Rs. 8,000 on a reduced principal of Rs. 80,000 and so on, till the last year, you would pay only Rs. 2,000 as interest. Unlike the fixed rate method, you would end up paying Rs. 1.3 lakh instead of Rs. 1.5 lakh.

This method is particularly used to calculate the interest payable for housing, mortgage, property loans, overdraft facilities, and credit cards. In this method, you have to only pay interest on the outstanding loan amount. The interest rates quoted for such loans are the Effective Interest Rate, which is similar to the interest rates used for Fixed Deposits (FD) and Savings Accounts.

In flat rate method, the interest rate is calculated on the principal amount of the loan. On the other hand, the interest rate is calculated only on the outstanding loan amount on monthly basis in the reducing balance rate method.
Flat interest rates are generally lower than the reducing balance rate.
Calculating flat interest rate is easier as compared to reducing balance rate in which the calculations are quite tricky.
In practical terms, the reducing rate method is better than the flat rate method.

Deal Lieutenant
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3522
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HondaSimpson wrote:

In flat rate method, the interest rate is calculated on the principal amount of the loan. On the other hand, the interest rate is calculated only on the outstanding loan amount on monthly basis in the reducing balance rate method.
Flat interest rates are generally lower than the reducing balance rate.
Calculating flat interest rate is easier as compared to reducing balance rate in which the calculations are quite tricky.
In practical terms, the reducing rate method is better than the flat rate method.

thanks Pro Blogger
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HondaSimpson wrote:

In flat rate method, the interest rate is calculated on the principal amount of the loan. On the other hand, the interest rate is calculated only on the outstanding loan amount on monthly basis in the reducing balance rate method.
Flat interest rates are generally lower than the reducing balance rate.
Calculating flat interest rate is easier as compared to reducing balance rate in which the calculations are quite tricky.
In practical terms, the reducing rate method is better than the flat rate method.

So, are you saying reducing 21.5% is better than flat 12% (for this above scenario)? 🤔

Better in terms of??

Cc: @SARDARKHAN

Deal Subedar
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1471
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deb3l wrote:

So, are you saying reducing 21.5% is better than flat 12% (for this above scenario)? 🤔

Better in terms of??

Cc: @SARDARKHAN

In Practical Terms.

Bro

12% = 21.5% is Reducing balance interest rate.

Both are same but First time you will pay 21.5% as you pay the next EMI the interest rate gets reduced until it becomes zero.

Pro Blogger
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HondaSimpson wrote:

In Practical Terms.

Bro

12% = 21.5% is Reducing balance interest rate.

Both are same but First time you will pay 21.5% as you pay the next EMI the interest rate gets reduced until it becomes zero.

Agreed!

Highest interest means lowest principal. And that goes along to maintain the FIXED EMI throughout the tenure.

So practically both are same IMO. That’s why asked.  