It is possible that while an individual is taking a loan, you will find out that some of the financial institutions give affordable interest rate compared to other banks. However, you must assure that if you're availing such offers, your EMI could be calculated in two ways either by fixed interest rate method or reducing balance method. Quite often people give too much importance to the interest rate applicable on an EMI and they overlook the method through which the interest rate on EMI will be calculated. You must choose the loan provider based on the interest rate applicable as well as the method with which the interest rate will be calculated.
Advantages of Fixed Interest Loans
- Interest amount applicable remains the same, and it is estimated based on the principal amount borrowed.
- The principal amount doesn't change in these types of loans with a change in time.
- The customer is offered flexibility concerning loan repayment tenure under this type of loan so that it matches the borrower's repayment capacity.
- This kind of loan has a low-interest rate, and it increases the loan eligibility of the customers.
- The risk associated with this type of loan is relatively less.
Disadvantages of Fixed Interest Loans
- The absolute EMI paid by the customer is much higher compared to any other scheme.
- Until the refinancing is done, the customer has to continue paying the same interest rate.
- The loan repayment tenure is longer under this scheme.
Difference between Fixed Interest Loan and Reducing Balance Loan
It is understandable for a customer to get thrown while selecting the kind of loan that will accommodate his/her needs while spending the least amount possible in the form of interest. You can check the list mentioned below to find out the difference between fixed and reducing balance interest rates and choose the scheme which suits you the best:
- The interest rate applicable under fixed interest loans is lower than reducing balance loans.
- The calculation of aggregate interest payable under the fixed interest loan scheme is easier than the estimation of aggregate interest under the reducing balance loan.
- The interest charged for a Fixed Interest Loan is computed based on the principal amount of loan acquired by the customer, and it doesn't change throughout the tenure of the loan. However, the absolute interest for a Reducing Balance Loan is estimated based on the outstanding principal amount after each EMI is paid.
- The interest paid under the Reducing Balance Loan reduces over time, and the amount of interest applicable under this type of loan is less than the fixed interest loan.
- In a real-time scenario, the reducing balance interest scheme is better than the fixed interest rate scheme.
- Loan tenure under a fixed interest loan scheme is much longer than the reducing balance loan scheme.