Very often we come across advertisements which offer lower rate of interest rate on loans. Many times, the lending institutions resort to advertising rate of interest with a asterisk mark and the asterisk mark will say that the rate of interest is a Flat rate. Some lenders advertise their loan products at Diminishing rate of interest. As a wise investor/borrower understanding both these types of Interest calculations will help you make correct decisions.
Flat rate method
Flat rate of interest is a simple rate of interest calculated on the full loan amount without giving effect to the amount of loan repaid.
Diminishing/Reducing Balance Method
On the other hand, diminishing/reducing rate of interest gives effect to the amount of loan repaid.
We will take the following calculation :-
Loan Amount Rs 100000/-
Tenure 5 Years
Rate of Interest 10% p.a.
Flat rate Method
Interest Amount = Rs. 50000/-
(100000 x 10% x 5)
EMI Amount = Rs. 2500/- per month for 5 years
(Rs. 150000 / 60 months)
EMI Amount = Rs. 2125/-
Total Amount paid = Rs. 127500/-
Interest Amount = Rs. 27500/-
The difference in Interest amount under both the methods is on account of the fact that under reducing/diminishing balance method, the principal repaid every month is taken into account for Interest/EMI calculation and as a result, the total interest amount under reducing balance is lesser than that of the interest as per Flat method.
We provide herewith the following tools for various calculations :-
1) Tool to Find out rate of Interest from EMI
2) Flat rate to Diminishing rate covertor
3) Diminishing rate to Flat rate convertor
Hope these tools will serve as an aid to make your decisions.
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Worksheet to find out Rate of Interest from EMI [wpdm_file id=3]
Flat rate to Diminishing Rate Convertor [wpdm_file id=4]
Diminishing Rate to Flat rate Convertor [wpdm_file id=2]