Flat vs Reducing Rate Calculator

Flat vs. Reducing Rate Calculator

In addition to the principal amount of the loan, interest is also paid to the lender. Different banks comparably compute loan interest rates. Also referred to as the Annual Percentage Rate (APR), the interest rate is frequently expressed as a percentage of the loan that is calculated annually using a flat vs reducing rate of interest calculator. A portion of each EMI payment goes towards the principal and another amount towards the interest on the personal loan. The majority of loan interest rate agreements contain higher interest portions at first, with EMIs that go down over time.

On the other hand, as the period lengthens, the EMI that is computed in relation to the principal amount increases, starting smaller. You may get the best interest rate for a personal loan by using one of the many interest rate calculation techniques available, like flat vs reducing interest rate calculator.

Whether interest is calculated on the initial principal or the balance outstanding principal determines which technique is used in the first place. Below is an explanation of the flat vs reducing rate of interest calculator. Also, here you can learn more about how to calculate reducing rate to flat rate.

Flat Interest Rate

An easy way to figure out loan interest is using a flat rate, often called a fixed rate. When there is a flat rate, the interest is computed over the whole principal amount for the course of the loan. Put otherwise, during the loan, you pay interest equal to a predetermined percentage of the original loan amount. However much of the principal you repay, the interest amount stays the same and doesn't go down over time. You can calculate the interest using a flat vs reducing rate of interest calculator.

Reducing Interest Rate

An approach to computing loan interest using a flat vs reducing rate of interest calculator that is more dynamic is to use a reducing rate. As you make regular payments, this strategy accounts for the principal amount's reducing outstanding balance. The interest is computed using flat vs reducing rate of interest calculator on the remaining balance, which decreases with each loan repayment.

"Reducing balance loans" is another term for loans with decreasing rates. Since they frequently yield lower interest payments, they are the more preferred option for the majority of loans, including mortgages, auto loans, and personal loans.

How is Flat Interest Rate Calculated?

As previously mentioned, computing flat-rate interest using flat vs reducing rate of interest calculator is straightforward. To illustrate this, let's consider the following scenario: Mr. A has secured an education loan of Rs. 2,00,000 for a duration of 3 years from an FNB institution, with a flat interest rate of 16%. To determine his Equated Monthly Installment (EMI), he must initially calculate the interest using a flat vs reducing rate of interest calculator. The formula for flat interest rate is as follows:

Principal Amount (P) x Rate of Interest (R)x Tenure of the loan (N) / number of instalments

= 2,00,000 x 16% x 3 / 36

= Rs. 2666.6

Once the interest has been determined on the loan, calculate the EMI:

= Principal Amount (P) / number of instalments

= 2,00,000 / 36

=Rs. 5555.5

Hence, the EMI will be:

= Rs. 2666.6 + Rs. 5555.5

=Rs. 8222.1

How is Reducing Interest Rate Calculated?

To compute the reducing balance interest using a flat vs reducing rate of interest calculator, the initial step is to ascertain the initial interest rate applicable to the loan.

Mr. B, for instance, has borrowed Rs. 1,00,000 at an interest rate of 16% for a duration of 3 years.

To determine the interest:

Principal Amount (P) x Rate of Interest (R)x Tenure of the loan (N) / number of instalments

= 1,00,000 x 16% x 3 / 36

= Rs. 1333.3

EMI on this loan will be:

EMI= (P X R/12) X [(1+R/12) ^N] / [(1+R/12) ^N-1]

= (100000*16%/12) *(1+16%/12) ^36 / (1+16%/12) ^36-1

= Rs. 3515.7

It's important to note that the Equated Monthly Instalment (EMI) remains constant throughout the loan tenure, as it has already been computed using the flat and reducing rate of interest calculator based on the principal loan amount. Consequently, the amount allocated to principal repayment will be:

=EMI - Interest

=3515.70-1333.33

=Rs. 2182.37

The new principal will be after calculating it using the flat and reducing rate of interest calculator:

= Old Principal - New Principal repayment amount

= 1,00,000 - 2182.37

= 97,817.63

How to Use Flat Vs Reducing Interest Rate Calculator

Using the calculator is a straightforward process; you can easily input the necessary details of your loan and begin the calculation. Here are the steps to guide you through the process:

Step 1: Input the principal amount you obtained as a loan into the flat rate vs reducing rate EMI calculator.

Step 2: Provide the details of the loan tenure and the agreed-upon interest rate.

Step 3: Click on 'calculate,' and the flat rate vs reducing rate EMI calculator will display the amount of interest you would pay on the loan you obtained.

Advantages of the Flat vs Reducing Rate Calculator

The benefits of using flat rate to reducing rate calculator are as follows:

• The Flat Rate vs Reducing Rate calculator is a conveniently accessible online tool that you can utilize from any location and at any time.
• It provides you with the interest amount on your loans in a matter of seconds.
• This tool is a time and energy-saving resource, eliminating the need for manual calculations.
• Additionally, it aids you in evaluating the overall cost of your loan.
• It serves as a user-friendly solution for effectively planning a loan.
• To use this calculator, you only need the basic details of your loan or the loan you intend to take.
• The calculator allows you to compare the two most commonly used interest calculation methods and discern the difference in interest paid.

Conclusion

In summary, the presumed advantages of lower interest rates and the simplicity of flat rate calculations may not be as beneficial as initially believed. Experts argue that despite the apparent simplicity of flat rates, they can be misleading, particularly for repaying substantial loans. Consequently, understanding the distinction between flat rate and reducing rate loans becomes crucial when considering a loan. Generally, reducing rate loans proves more advantageous for borrowers, leading to lower overall interest payments and providing a transparent repayment structure.

Therefore, it is advisable, before applying for a loan, to utilize online calculators to verify the interest charged under both options. This allows for an informed decision-making process. Additionally, if uncertainties persist, seeking guidance from a professional consultant is recommended. They can offer clarification on the interest calculation methods associated with both flat and reducing interest rates.