Interest is a portion of the loan amount over and above the principal amount which is repaid to the lender. Personal loan interest rate also works in a similar way for various banks and NBFCs. Interest rate is usually depicted as a percentage of the loan which is calculated annually also known as Annual Percentage Rate (APR). Each EMI repayment has a portion which goes towards the principal amount and the quantity which goes towards the personal loan interest. Every best personal loan interest rate deal will have higher interest portions in the initial EMIs which reduce as the EMIs progress. On the other hand, the EMI adjusted against the principal amount is lower at the start of EMI repayment and increases as the tenure progresses. There are different ways in which interest rates are calculated and you can get lowest interest rate for personal loan based on the method.
The first method is based on whether the interest is calculated on the initial principal or on the balance outstanding principal. The difference between reducing balance rate of interest and flat rate of interest is shared below,
Reducing or Diminishing Rate of Interest
In this case the personal loan interest rate is calculated on principal amount outstanding at the end of a specific period. As detailed above, with every EMI paid there is a certain portion that is adjusted against the principal and the balance goes towards interest. While calculating the interest, the next calculation is on the principal balance outstanding and not the initial principal amount. To understand this better let us look at the example below,
Let us assume you have a loan amount of Rs. 5,00,000 with an interest rate of 15% which needs to be repaid in 5 years. The EMI in this case would be Rs. 11,895/- per month. In the 1st year, you pay a total EMI of Rs. 1,42,740 of which Rs. 72,596/- goes for interest and the balance Rs. 70,144/- goes towards interest. Now the interest rate is calculated at 15% only on the balance principal amount i.e. Rs. 4,37,404/- . Using this method if you have the ability to pay larger amounts as part payment, you will reduce you interest paid. The lowest interest rate for personal loan by way of EMIs are possible to obtain through this method.
Flat Rate of Interest
In this case the personal loan interest rate is calculated on the initial principal amount without accounting for the principal repaid. This method of interest calculation results in a higher EMI. This can be understood better with the example below,
Let us assume you take a Rs. 1,00,000 loan at 10% interest rate. The interest component for every year would be 10,000/-. So in case you would like to repay the loan in 3 years, the total of the principal amount and the interest rate would be Rs 1,00,000/- + Rs, 30,000/- i.e. Rs 1,30,000/- This will be divide by 3 years i.e. a total Rs 1,30,000/- divided by 36 months i.e. Rs. 3612 per year. The same in case of a reducing balance approach would be would be Rs. 3227/-. This the best personal loan interest rate you can look for in the case of some private lenders for a quick loan.
Here are some stories of our customers with insights to help you make better financial decisions,
Understanding Interest rates helped a Neelam save money on her personal loan!
At Cashkumar we have always strived to make financial sense for people and always give good advice first. Lot of times people think a business is there just to make a quick buck. The general attitude is that loan agents just want to push through your loan without consideration to your well-being. While this was the case some time back, loan aggregation platforms like Cashkumar are bringing about a change by undertaking a customer first approach. This was proven again in a case we recently handled where a customer got good advice and clarity on financial workings.
Neelam is a customer from Kolkata who was in need of a personal loan to meet some home related requirements. She had been recommended to an agent with whom she wanted to get her loan processed. Just to check again, Neelam decided to go online and leave a request at our site. The profile was studied by our customer service representatives and we found out that Neelam was working for a category C company and received a salary of about 28K a month. Based on our algorithm we found out that she was eligible for a loan of about 2 lakh from a noted bank at an interest rate of 16%. We conveyed the same to Neelam who was not impressed. She told us that the agent was getting her a personal loan for an interest rate of 12%.
Our customer service representative was surprised as personal loans are not given at such a low rate for her profile. But she soon realized that Neelam was being given a flat rate. Our rep instantly asked Neelam to not sign any documents for the loan without figuring out the EMI first. She explained the difference to Neelam and quickly calculated the EMI for her based on a 16% on reducing balance and 12% flat on the same amount. Obviously Neelam was shocked to find this fact and assured us that she will not take the loan now without being aware of all terms. Our rep was happy to help her make a sensible choice.
Neelam called us back after 3 days and said that she had refused the loan which was being arranged by her agent. She had expressly asked them for the terms and found out that the 12% flat interest rate and the EMI was way too high. She thanked our rep for deducing this and helping educate her unless which she would have taken a high cost loan. She saw the merit in the loan offer we had found for her and decided to take it. A small suspicion and lack of information might have cost Neelam a whole lot of money. Thankfully we were there at the right time to help her.