Know How to Stay Away from the Flat Interest Rate Trap
Are you going to apply for a home loan to buy your home loan? Congratulations! Availing a loan facility to fulfilling a wish is not a new concept these days. People apply for a personal loan, home loan, education loan, loan against property and more.
The procedure of availing a loan has made it simple – especially online lenders. If you have the required home loan eligibility, nothing can stop you from having the loan approved and disbursed.
It is also quite common to know that no matter what kind of loan you avail, you also have to repay it along with the applicable rate of interest. The home loan interest rates or any other loan may be calculated in two different ways.
The first one is known as the flat interest rate, and the other is the reducing balance interest rate.
What is a Flat Home Loan Interest Rate?
As the name suggests, a flat home loan interest rate implies that the interest element on the home loan will remain the same throughout the tenor.
It also means that the interest will be computed on the total principal amount until the end of the tenor.
The principal and the interest component remains the same until the final EMI of the loan.
A part of the principal amount gets paid along with every EMI. However, while calculating the flat interest rate, the interest gets also calculated on the principal amount which has already been paid.
As a result, if you go for the flat home loan interest rates, you will need to manage up to 2 times more than the interest what you agreed on the loan agreement.
What is a Reducing Balance Interest Rate?
A reducing balance interest rate gets calculated every month on the remaining loan amount. In this, the EMI covers the interest payable for the outstanding amount for the month.
As a result, after the payment of each EMI, the remaining loan amount decreases. Hence, the payable interest for the next month gets calculated only on the unsettled principal amount.
A reducing balance interest rate is generally applied in a housing loan, loan against property, credit cards, mortgage loans, loan overdrafts and more.
A Word of Caution
You need to pay up to 2 times more while choosing the flat home loan interest rates and this is not shown to you while availing the loan.
Hence, it is nothing but a marketing gimmick by lenders to lure you towards subscribing to their loans.
When you are aware that you will pay only a fixed EMI that won’t affect the monthly income, you happily opt for it.
But, the lenders show only the rosy side of it. Such traps are so deep that you won’t realize that you are trapped.
People are generally in desperate need of money to realize their dreams. They don’t bother about going through terms and conditions and get trapped easily by the lenders.
Thus, when it comes to opting for a home loan in India or any other loan type, you must take out time to understand the total loan amount that you will need to repay. You can also utilize an online tool such as the home loan EMI calculator to know more.
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