Small-ticket personal loans constituted 60% of the total personal loans disbursed in India, as of March 2020. This number is likely to grow further, thanks to increased consumption, easy availability, and affordable interest rates.
However, lenders calculate or charge interest on a personal loan in two different ways – flat interest rate and reducing balance interest rate. Since interest rates determine a loan’s affordability, individuals need to choose carefully before applying for funds.
Prospective borrowers must compare the two types of interest rates to make an informed decision.
Flat interest rates vs reducing balance interest rates
A flat interest rate refers to a lending rate that remains similar for the entire tenure. Borrowers get to know about the precise EMI payable from the beginning. Contrarily, reducing balance interest rates, also called diminishing interest rates, depending on the outstanding principal amount.
Thus, interest tends to reduce over time as the principal outstanding reduces. Along with that, individuals should also follow some useful insights into factors affecting personal loan interest rate.
Here are a few differences between these two types of interest rates.
- A flat interest rate is charged on the total principal amount sanctioned, whereas a reducing balance rate is calculated on the outstanding principal amount.
- This diminishing method reflects the effective interest rate equivalence in the loan tenure’s initial phase, unlike a flat rate loan.
- The calculation of flat interest rate is comparatively less complicated than the diminishing one.
Individuals willing to opt for a reducing balance interest rate personal loan can check the following section for more details on applying for one.
How to apply for a personal loan with a reduced interest rate?
Individuals can follow the below-mentioned steps to apply for a personal loan on diminishing interest rates.
- Navigate to the official website of your preferred lender and download the online application form.
- Enter your personal, employment, and financial details.
- Select the loan tenure and amount.
- Submit the application form along with necessary documents.
- The representative of the lender will contact you shortly for verification.
- The loan amount will be disbursed within 24 hours* to the account of eligible candidates.
Top NBFCs like Bajaj Finserv provide loans up to Rs.25 lakh at affordable interest rates.
To make the loan availing process easier, it also provides pre-approved offers that make the processing more straightforward and prompt. These offers are available on various financial products like personal loans, business loans, and credit cards. All you have to do is enter your name and contact number to check your pre-approved offer.
Since this offer expedites the entire credit availing process, individuals can use this personal loan for medical emergency.
Besides, individuals also should know about the benefits that they can reap while opting for reducing balance interest rate on a personal loan.
Benefits of availing a loan with reducing balance interest rate
Most borrowers settle for reducing balance interest rates as the interest component reduces along with the outstanding principal amount. It eventually lowers the EMI burden to a great extent.
Moreover, if a lender lowers its lending rate, the interest accrued and EMI payable also goes down to a certain extent.
Nevertheless, alongside the interest payable, you should also know about the fees and charges applicable on your personal loan. Moreover, individuals looking for an emergency loan can also opt for this interest rate and repay the same faster.