The overall growth in the personal loan sector has been quite remarkable where it increased by 11.2%, hitting the 25 trillion-mark in July 2020. Vario
The overall growth in the personal loan sector has been quite remarkable where it increased by 11.2%, hitting the 25 trillion-mark in July 2020. Various major factors over these past 2 years gave rise to a liquidity crisis among individuals and further led them to opt for personal loans to solidify their financial standing.
With an easy application process and nominal requirements, availing a personal loan has been much easier than other traditional financing options. However, this particular type of loan comes with both flat and reducing balance interest rates, and the repayment part also differs from one another. Interest rate plays a huge role since the borrower’s repayment liability depends on it.
Therefore, it is advisable to understand the functions of both kinds of interest rates to manage their expenses better.
What is a flat interest rate in a personal loan?
This is the kind of lending rate that remains the same throughout the tenure and gets charged on the principal loan amount only. This rate is calculated and decided by the lending institution at the very beginning. Individuals are supposed to pay EMIs on the basis of that calculation. As these rates are usually on the higher side, it makes them less convenient among borrowers.
What is a reducing balance interest rate in a personal loan?
This particular interest rate keeps changing depending on the amount you have paid so far, which means it gets imposed on the reduced balance of your personal loan amount. There are three kinds of reducing balancing systems under this lending rate – monthly, daily, and annual reducing balance systems.
In the case of the first one, the interest rate gets charged on the outstanding balance, remaining after paying your monthly instalment. The annual reducing balance system involves imposing the interest rate on the outstanding amount, remaining at the end of each year.
Since there are certain factors that can affect your personal loan interest rate, it is important to pay attention to them from the get-go. Generally, the website of every lending institution contains adequate details regarding their offered interest rates. Alongside information on the fixed vs floating interest rate, you can find pretty much every detail from these online portals. You can even calculate EMIs using the personal loan calculator to know the exact amount you will be paying each month.
Conversion of flat interest rate into reducing balance
Due to all the convenient features, individuals are more inclined towards reducing balance interest rate. Nonetheless, it is advisable to do thorough research on different types of interest rates before applying for the personal loan as it involves a lengthy process.
Nowadays getting your preferred loan has become even easier since top financial institutions such as Bajaj Finserv provide pre-approved offers to make financing less time-consuming. These offers are available on various financial products such as personal loans, credit cards, etc. You can check your pre-approved offer by simply submitting necessary information like your name and contact number.
In order to manage your personal loan EMI repayment efficiently, it is necessary to have a clear understanding of the aspects related to your personal loan interest rates. Moreover, during emergencies, choosing reducing balance interest rate over flat interest rate comes as a better option to eliminate financial liabilities affordably as these are usually lower.