A Comparison of Flat and Reducing Personal Loan Interest Rates

People always say that you need to avail of a quick loan online only when it's an emergency, and you've exhausted all your other options. But try as you might; there are plenty of reasons why you may end up needing a quick loan online – from medical emergencies to credit card EMIs. You may also be hit with unforeseen expenses – in such a case, you'll have to clear it somehow with emergency funds if you're running short of cash. A personal loan can help you in such a scenario. Now, we already know how convenient and pocket-friendly it is to get a personal loan. You can approach many lenders for the same. However, you need to be careful regarding factors like the interest rate, repayment tenure, etc. The interest rate on a personal loan is calculated using one of two methods – the flat interest rate or the reducing interest rate.

In this article, we'll tell you all you need to know about both methods. In addition, this will help you understand if there's any difference between the two.

Flat Interest Rate

This is a method of interest calculation that's traditionally applied to personal loans. Known as the 'fixed' or 'flat' interest rate, it is pretty straightforward and easy to understand. Here, the interest rate is calculated on the entire online quick loan amount that you've availed of, which is your principal amount. Every month, the principal is always considered for calculating interest. So, first, the total interest on your loan is calculated and added to your principal amount. Then, this amount is equally divided across your loan repayment tenure. So, your monthly EMI will remain the same, whether you're paying your second or second-last EMI.

Reducing Interest Rate

Under this method, the interest rate reduces every month. It is calculated upon the outstanding principal, which also reduces every month. When you pay your monthly EMIs, you pay a part of it as interest, and the rest goes towards paying off your principal amount. This is how the principal amount reduces for the next month. Consequently, the interest amount on the same will decrease as well. This will continue as you pay off your EMIs, and the interest amount will get lesser with every EMI.

Which is More Affordable?

Now for the most important question – after having understood how your lender calculates interest on your quick loan online, which method is more affordable? It is the reducing interest rate method, where your interest outflow reduces every month. But the amount you will save depends upon the interest rate, principal amount and loan terms. More often than not, the amount of money you save by employing the reducing interest method won't be significant as the flat rate method. What you can do is get good clarity regarding your loan terms before accepting a loan offer from them.

Wrap Up

The interest rate on your personal loan is calculated based on several factors – the loan type, loan amount, repayment tenure, creditworthiness, repayment capacity and so on. Rather than giving undue emphasis to the interest rate or calculation method, you need to ensure you have adequate repayment capacity for the loan. This will help you avoid a debt trap. At KreditBee, you can avail of quick loans online up to ₹3 Lakhs from the comfort of home. For more information on how you can do that, email us at [email protected], and we will take it from there.