Big pocket expenses or financial emergencies can knock your doors anytime. It is very apparent to consider fulfilling your requirement with a personal loan. While your need may be urgent, it may take weeks for banks or financial institutions to revert to your loan application, which may or may not be in your favour. Thanks to fintech companies, availing a personal loan online has become a cakewalk.
One of the most important factors you need to consider is the rate of interest. Various lenders offer different interest rates for personal loan; however, its variation may depend on number of factors like income stability, creditworthiness, etc. Before you take a plunge and zero in on your personal loan provider, here’s the basic thing you need to understand about interest rate for personal loans – its structure. Let’s take a look.
Types of Interest Rates Structure for Personal Loan
- Flat Rate Structure
As the name suggest, the structure has a flat interest rate; as in, all through the term of the loan, the rate of interest remains constant. In your loan EMI, your principal amount and interest component are same throughout your repayment tenure.
Here’s how it is calculated –
P x R X T / 100 = A
P = Principal Amount You Borrow
R = Rate of Interest Applicable on the Loan
T = Tenue of the Loan in Years
A = Total Interest to be Paid During the Tenure
For example: If you avail a loan Rs. 200,000/- on 10% rate of interest for a period of 3 years; this is how it will be calculated:
200,000 + (200,000*10*3)/100 = 260,000
Here, Rs. 260,000/- is the total amount you would repay in the form of EMI, wherein, Rs. 60000/- is the total interest.
- Reducing Balance Structure
As the term implies, the interest in this structure is calculated on the reducing balance every month, as your principal liability goes down with each EMI. Also known as effective interest rate, it is lucrative for you to opt for this structure as it reduces the interest load with every payment and time. Usually in this method, interest component is higher during the initial repayment period of the loan and as the time progresses, it reduces and during the last period of the term, you practically are left to pay only the principal amount.
It is quite evident from the analysis that reducing interest rate structure is recommended over flat interest rate structure. So, when you apply for a personal loan online, understand what the structure of interest rate offered on your personal loan is and then take a call.
Check for your online personal loan eligibility on MYFI – one of the leading online platforms that connects you with the lenders across the industry.