Flat vs Reducing Rate EMI Comparison
Compare Your Monthly EMI
What is the Difference Between Flat Rate and Reducing Rate?
The Flat Rate interest scheme calculates interest on the entire loan amount throughout the loan tenure. This means the EMI remains the same, but you end up paying more interest overall. In contrast, the Reducing Rate interest scheme calculates interest on the outstanding principal, which decreases over time. As a result, the EMI reduces over the loan period, and you pay less interest in total.
How Does the EMI Comparison Calculator Work?
The EMI Comparison Calculator helps you estimate the monthly EMI and total interest paid under both Flat Rate and Reducing Rate interest schemes. The calculator considers the following parameters:
- Loan Amount: The total amount borrowed.
- Interest Rate: The flat interest rate and reducing interest rate offered by the lender.
- Loan Tenure: The duration over which the loan is to be repaid, usually in years.
The calculator uses the following formulas:
Flat Rate EMI Formula:
EMI = (Loan Amount + (Loan Amount × Flat Interest Rate × Loan Tenure)) / (Loan Tenure × 12)
Reducing Rate EMI Formula:
EMI = [P × R × (1 + R)^N] / [(1 + R)^N – 1]
Where:
- P = Principal loan amount
- R = Monthly interest rate (annual interest rate / 12 / 100)
- N = Number of monthly installments
Benefits of Understanding Interest Rate Schemes
- Informed Decisions: By comparing the flat rate and reducing rate schemes, you can choose the one that best suits your financial situation.
- Cost Management: Understanding the total interest paid in each scheme helps you manage the overall cost of your loan.
- Budget Planning: Knowing your EMI in advance allows you to plan your monthly budget effectively.
Frequently Asked Questions (FAQ)
1. Which is better, flat rate or reducing rate?
Generally, the reducing rate is better because it calculates interest on the outstanding principal, resulting in lower interest payments over time. However, the choice depends on your specific loan terms and financial situation.
2. Why is the EMI higher in a flat rate scheme?
In a flat rate scheme, interest is calculated on the entire loan amount for the entire tenure, which results in a higher EMI compared to the reducing rate scheme, where interest is calculated on the reducing balance.
3. Can I switch from a flat rate to a reducing rate during my loan tenure?
Some lenders may allow you to switch from a flat rate to a reducing rate during the loan tenure, but it usually involves additional charges. It's best to check with your lender for specific terms and conditions.
4. How does loan tenure affect my EMI in these schemes?
In both schemes, a longer loan tenure will result in a lower EMI but higher total interest paid. It's important to choose a tenure that balances your monthly budget with the total cost of the loan.