When applying for a loan, it’s essential to understand that banks and non-banking financial companies, or NBFCs, offer different loans for your needs. These include home loans, personal loans, MSME loans for a business, and even corporate loans. When applying for a loan, you choose between a reducing interest rate and a flat rate.
As many people don’t understand the difference between the two, they often choose the wrong rate for their needs. The wrong interest rate for you results in spending more to pay back a loan and future loan avoidance. Read on to learn which loan type is best for you.
What Is A Flat Rate?
A flat rate is an interest rate that calculates interest based on how much a borrower receives on the loan. However, the interest rate remains the same and does not decrease throughout the loan term despite the borrower making scheduled repayments to pay back the loan.
As the interest is calculated for the entire amount of the loan, flat interest rates are higher than a reduced interest rate. However, the nature of flat interest rates makes it easy to calculate and track as it doesn’t include any compounding calculations. Therefore, the terms and commitment of the loan are more straightforward.
What Is A Reducing Interest Rate?
Reducing interest rates are often better for those who take out a loan as they won’t be paying more on interest. A reducing interest rate is also known as a diminishing interest rate.
With a reducing interest rate, the interest rate on the loan is calculated based on the outstanding loan amount each month. The benefit of this type of interest rate is that the person who took out the loan pays less interest in the long run than those who took out a flat interest rate loan.
Differences Between Flat Rate And Reducing Interest Rate
There are a few differences between flat rate interest rates and reducing rate interest rates. Compared to the reducing interest rate, the interest on a flat rate is easy to determine with a simple flat-rate interest calculator. With a flat rate, the loaners, whether from a bank or an NBFC, use the initial principal to calculate the interest no matter how much you’ve already paid or the balance remaining on loan.
The bank or NBFC recalculates the interest based on the balance remaining with a reducing interest rate. While a reducing interest rate starts higher than a flat rate, it’s better for the borrower in the long run as it offers flexibility in reducing the interest burden over time.
What About Refinancing A Car Loan?
With people who have auto loans or are seeking auto loans, we’re often asked if they can refinance a car loan with the same bank. While you can refinance a car loan with the same bank, not all lenders offer refinancing services. So it’s always good to do your homework before assuming your lender does offer refinancing services, or even if they’re not the best option for you.
According to Lantern by SoFi, “Refinancing your auto loan can be a useful tool in achieving a number of financial goals.” They are an online marketplace for everybody to learn more about the different types of loans we offer and compare prices and options from affiliate partner lenders. Whether you need money tips, helpful resources, or want to get started on a loan, Lantern Credit is always here for you.