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Fixed vs Reducing Interest Rate on Loans: Understanding the Difference in EMI & Interest Costs
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What Happened?
Understanding the difference between fixed and reducing interest rates is crucial for borrowers. Fixed rates offer stability, while reducing rates can lead to lower overall costs.
Key points
- Fixed interest rates remain constant throughout the loan tenure.
- Reducing interest rates are based on the outstanding principal, potentially lowering total interest costs.
- A ₹5,00,000 loan at a fixed rate of 10% results in ₹1,50,000 total interest payable.
- The same loan at a floating rate of 14% results in ₹1,15,197 total interest payable.
- Borrowers can save ₹34,803 in interest with a floating rate compared to a fixed rate.
Key insights
- Choosing the right interest rate can significantly affect overall loan costs.
- Fixed rates provide predictability, which is beneficial for budgeting.
- Reducing rates can lead to substantial savings if market rates decline.
Why it matters
Understanding these interest rate types can help borrowers make informed financial decisions.
Source
Times Now
