Compare and convert flat interest rate to reducing balance interest rate. Understand the real cost of your loan and the savings on EMI payments.
Interest is a portion of the loan amount over and above the principal that is paid to the lender. The rate is shown as an annual percentage (APR), and every EMI is split between principal and interest. There are two common methods used to calculate this interest.
Interest is calculated on the outstanding principal at the end of each period. As you pay down the loan, the interest component of each EMI shrinks, resulting in a lower effective cost.
Interest is calculated on the full original principal for the entire tenure, regardless of repayments made. This always produces a higher effective rate than the equivalent reducing balance figure for the same EMI.