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what is defference between flat rate and reducing rate, and
which is more affortable for borrower?
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Answer Posted / h.r. sreepada bhagi
Presuming that the question is about the rate of interest
charged by the lenders on the money borrowed as loan by
their customers, these concepts are answered below :
Flat Rate - Interest will be charged flat on the borrowed
amount at a fixed rate for the whole period of loan. Example
Rs. 5 Lac borrowed @10% for 3 years. Total interest will be
Rs.1.50 Lacs. Irrespective of repayment, the borrower will
pay interest on the whole amount of loan.
Reducing Rate - Interest will be charged at a fixed rate on
the balance outstanding at the end of the month quarter,
half year or year, as agreed between the lender & the
borrower. This is generally better for the borrower, However
both the options have to be compared before borrowing, as
generally the rate of interest will be lesser in case of
reducing balance method.
Floating Rate - Rate of interest changes from time to time
based on market forces & the policy of the lender.
Fixed Rate - Rate of Interest is fixed during the tenure of
the loan.
In all the cases the loan agreement & terms should be
studied carefully.
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