Every time there is a rate cut announcement from the Reserve Bank of India (RBI), potential home loan buyers are being loaded with jargon-filled rate information by lenders. The number crunching and use of complex words can make home buyers feel that they are getting the best bargain, which cannot be true always.
One way to counter such technicalities is to get abreast with such details, which are as follows:-
Flat rate: It is a flat rate of interest charged on a loan. For instance, if an individual has borrowed a loan of Rs. 1,00,000 for a tenure of 5 years at 10% flat interest rate, then the amount payable each year will be Rs. 30,000 (20,000+10,000).
Reducing balance rate: Unlike flat rate, reducing balance rate charges interest rate on the outstanding principal amount after deducting the principal on which interest has been paid already. So, in above example, the interest will be charged on Rs. 1,00,000 in the first year, i.e., Rs. 10,000 and on remaining balance of Rs. 80,000, i.e., Rs.8,000 in the second year and so on. Since the interest is charged on outstanding principal amount, which tends to decrease over a period of time, therefore interest paid under reducing balance rate is always lower than the flat rate.
Rest: Rest is a term associated with reducing balance rate loans. ‘Rest’ is a period specified by a bank after which it will recalculate the outstanding loan amount in accordance with the principal amount paid back. The rest period can be specified as annual, monthly or daily.
For example, in ‘annual rest’, the bank will calculate the reduced outstanding balance at the end of one year. This means that even if a borrower pays a monthly EMI, still he will be charged interest on the full outstanding amount and the same will be reduced only annually. Similarly, monthly rest means that the outstanding loan amount will be reduced each month. Interest paid under annual rest will always be higher than the interest paid under monthly rest.