The primary source of income for banks and NBFCs is the interest rate that they charge their borrowers while offering different types of loans. When it comes to loans, two types are offered – fixed and reducing balance interest rate. Hence, if you wish to know the basic difference between the two, then this post will help you out! What is the fixed or flat interest rate? The fixed interest rate means that the personal loan interest rate or any other loan will be fixed throughout the tenure. The interest is calculated on the entire amount via the tenure. But the fixed rate of interest is a bit more expensive than reducing the balance interest rate. The benefit of the fixed loan rate is that you will continue to pay fixed EMIs throughout the tenure. This way, you can have complete control of your repayments. What is reducing balance interest rate? The reducing balance interest rate denotes that the rate of interest on personal loan is calculated on the outstanding loan figure. It means that the EMI will have the interest part being paid for the outstanding loan, along with principal repayment. After you keep paying EMI per month, the outstanding amount continues decreasing. The interest for the next month’s interest rate on a personal loan is measured only on the basis of the outstanding loan figure. The reducing balance interest rate is used for housing and other loans like credit cards and an overdraft. Compared to a flat rate, the reducing balance interest rate is less expensive. Based on your repayment capacity and considering other elements, you should choose either the fixed rate or the reducing balance interest rate. Bajaj Finserv offers pre-approved deals on personal loans and more to simplify loan processing. You can check out your special pre-approved offers after sharing your necessary details like the name and mobile number. Additional Read: Choose Best Option Betwwen Flat Or Reducing Interest Rate
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AuthorAman Khanna is an experienced financial advisor who is well known for his ability to foretell the market trends as well as for his financial astuteness. He has an MBA in finance from Toronto University as well as years of experience delivering seminars on sound financial practices and debt management. |