A Quick Insight Into Reducing and Flat Personal Loan Interest Rates

Posted by Arwind Sharma on April 29th, 2019

A personal loan is one of the most preferred financial tools these days by borrowers. It is because the facility helps them cover their needs without issues. Anyone who can meet a lender’s loan eligibility terms can access the desired loan money soon.

A personal loan is an unsecured one and hence, you don’t need to submit any collateral or security. If you have the required creditworthiness such as strong CIBIL score, repayment, and employment history, you can get the loan approval. However, personal loan interest rates are on a higher side to cover a lender’s risk of defaults.

When it comes to the application of personal loans, you can see lenders offering you with two types of interest rates. They are reducing rates and flat rates. If you don’t have much idea about the personal loan interest rate, then this article will guide you.

Some insights on personal loan interest rates

What are personal loan interest rates?

When you apply for a personal loan to a lender, they offer you funds. However, in return, a borrower needs to pay the principal and interest rate over a tenor. It is nothing but the charge availed by a lender for offering you the loan amount. It also gives lenders some security if loans are not paid.

Personal loan interest rates are generally higher as they are unsecured and a borrower doesn’t need to provide any collateral. While applying for a personal loan, you may come across two types such as fixed and reducing rates.

  • Fixed personal loan interest rates

In this type of offered loan interest, the rate of interest is fixed throughout the loan tenor until it is completely paid off. Here is an example to help you know more.

Let’s suppose you availed a personal loan of Rs.3.5 lakh at a fixed or flat interest rate of 12% for a tenor of 3 years. Here, your yearly interest payout will be Rs.42,000. You will also be paying Rs.3,500 towards the interest. In the next 3 years, the total interest payable will be Rs.1,26,000.  

Even though you pay the EMIs that will reduce the principal, you will keep paying higher interest rates. Flat personal loan interest rates can be 1-2% more when converted into effective market rates.

  • Reducing personal loan interest rates

Most of the lenders these days calculate interest rate on reducing balance system. As per the norms of this method, the interest gets calculated on the remaining loan outstanding amount. It is nothing but an amount that remains after previous interest deduction. As a result, the interest amount that you pay also reduces.

The reducing personal loan interest rates method is beneficial for borrowers as the cost of interest also goes down.

  • Difference between flat rate and reducing balance method

Both the methods of personal loan interest rates are logical. However, the flat rate method is not completely beneficial for borrowers. It is because they have to pay a higher amount as personal loan interest. It is because the personal loan amount for interest calculation is normally unchanged.

On the other hand, under the reducing balance method, the interest amount reduces as a borrower continues paying off the EMIs each month.

Overall, the reducing method of computing personal loan interest rate has got more practical value because the total interest payout remains technically lower.

When you are applying for a personal loan, you may be lured into surprisingly lower rates. But, being a smart borrower, you should ask the lender about the interest calculation method.    

You may be surprised and shocked to know that a 10% personal loan interest rate calculated on fixed rate would cost higher than a 15% loan on a reducing method.

Thus, when you are applying for a personal loan to cover your needs, you should ensure to opt for the reducing balance system to save money.

Tips for enjoying a lower interest rate on personal loans

  1. Compare loan offers

One of the best ways to opt for a lower interest rate on personal loans is comparing all available offers on a third-party website. Once done, you can pick one suiting your needs and repayment capacity better.

  1. Maintain higher CIBIL Score

Maintaining a higher CIBIL score above 75- can let you negotiate for a lower interest rate on personal loans. Lenders can oblige as you have repaid your previous debts on time.

  1. Apply to a lender you have an association with

Applying for a lender you have a salaried bank account can also help you borrow lower interest rate on personal loans. It is probably because the lender knows about your financial history better and may not want to lose you out to another lender. As a result, you may get a lower interest rate on personal loans.

If you are looking to apply for a personal loan to meet many needs urgently, you can apply for it online on a leading lender’s website.

Bajaj Finserv also offers pre-approved deals on personal loans, home loans, business loans, EMI finance, and many more financial products. Such deals can simplify your overall loan processes and make it less time-consuming.

You can share some of your basic details such as name and mobile number to unlock your customized pre-approved loan offers right away!

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Arwind Sharma

About the Author

Arwind Sharma
Joined: April 15th, 2016
Articles Posted: 48

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