Mortgage Loan Interest Rates
Personal loans are unsecured loans which can be availed from different banks. Each bank has its own eligibility criteria based on which loans are disbursed. The same can be found on the eligibility criteria page on Cashkumar. There are multiple pointers that play an important role while choosing a loan such as the interest rate, processing fee, pre-closure charges, turnaround time and so on. The interest rate in turn is depended on parameters such as loan amount, company that you working for, you salary bracket and so on.
Interest Rates - Explained
Interest is a portion of the loan amount over and above the principal amount which is repaid to he lender. 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 remaining is calculated as Interest. Usually, the interest portions are higher in the initial EMI’s and reduce as the EMI’s progress. On the other hand, the EMI adjusted against the principal amount is lower in the start of EMI repayment and increase as the tenure progresses. There are different ways in which interest rates are calculated, a gist is shared below.
The first method is based on whether the interest is always 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 rate of interest is calculated on outstanding principal amount. 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 take an example below,
Let us assume you have a loan amount of Rs. 5,00,000 with a interest rate of 15% which needs to be repaid in 5 years. The EMI for this case would be Rs. 11,895/- . 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 flexibility to pay larger amounts as part payment, you will reduce you interest paid.
Flat Rate of Interest
In this case the interest rate is calculated on the initial principal amount without accounting for the principal repaid. This method of interest calculations results in a higher EMI. This can be understood better with the example below
Let u 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 make the repayment 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/-.
We will now consider the difference between fixed rate of interest and a floating rate of interest,
In this case the EMI is fixed across the tenure of the loan. This is not subject to any market conditions what so ever. The advantage in this is that you can always account for your EMI without being worried about the market movements as the EMI is always fixed. This has s significant advantage if the base rate increase during a monetary policy as your EMI would not change. However, the downside is very evident that in case the base rate reduces, the Emi still stays the same. Also the fixed rate of interest is usually 1.5% to 2% more than the floating rate of interest.
In this method of calculation, the interest rate varies with the base rate plus a certain floating element above the base rate. This is subject to market conditions and could vary as either ways. The main advantage of this vis-a-vis fixed rate of interest is that it a good 1.5% to 2% lesser than the fixed rate. In case the floating rate does go above the fixed rate, it would be only for a short duration and not for the complete tenure. You would find most of the customer opting for a floating rate of interest if the tenure is for a long duration like a home loan or a mortgage loan.