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    Types of interest rates on loans: what a quoted rate is a rate of

    A loan rate is not a price until you know what it is charged on. Nine percent of ₹3 lakh every year for three years is ₹81,000. Nine percent a year on whatever you still owe, month by month, is ₹43,437. Both loans can be described as '9 percent over 36 months', and the gap between them is ₹37,563. That is the part of the types of interest rates on loans that the usual fixed-or-floating discussion leaves out: the method matters before the movement does.

    So this page treats a rate as the answer to two separate questions. What balance is it charged on: the original principal (flat) or the amount outstanding (reducing balance)? And can it change after you sign: fixed, or floating with a benchmark? A third detail, how often interest is added, sits inside the second method and costs more than people expect on long loans.

    Each question is worked in rupees below: converting a flat quote by hand, a 50 basis point rise on a floating home loan absorbed by the EMI or the tenure, what a fixed-rate premium buys, and why the annual percentage rate on the Key Facts Statement puts them all on one line.

    Types of interest rates on loans: two questions

    The technique

    Method and movement are separate choices

    Borrowers are usually offered 'fixed or floating' as if that were the whole decision. It only answers whether the rate can move. The other question, what balance the rate is charged on, changes the cost of a short loan far more, and it is the one a quote rarely spells out unless you ask.

    Every loan rate sits on both axes. The method decides how much interest a given rate produces; the movement decides whether that rate stays put. The same printed rate means different money on a flat, fixed loan and a reducing, floating one.

    The table shows where each type usually turns up. That is common practice, not a rule: your sanction letter and Key Facts Statement state the method and whether the rate can move.

    TypeWhat the rate is charged onWhere you usually meet it
    FlatThe original principal, for every year of the loanSome consumer durable and vehicle loans, often quoted at the store or dealer
    Reducing balanceOnly what you still owe, recalculated each monthMost personal loans and home loans from banks and NBFCs
    FixedOne rate set at sanction, sometimes for an initial period onlyMost personal loans; some home loans for a fixed period
    FloatingA benchmark plus a spread, reset on a scheduleMost home loans and loans against property
    Flat and reducing describe the method; fixed and floating describe movement. A loan has one of each.
    • A dealer quote and a bank quote can use the same word, 'rate', for two different calculations. Until you know the method, a lower number is not evidence of a cheaper loan
    • Method matters most on short loans, movement on long ones: a flat quote does its damage on a car loan, a floating reset on a home loan

    Flat rate vs reducing balance rate in rupees

    Take ₹3,00,000 over 36 months at an illustrative 9 percent, first flat, then reducing.

    Flat: interest is the principal times the rate times the years, ₹3,00,000 × 9 percent × 3, which is ₹81,000. Add it to the principal and split the ₹3,81,000 into 36 equal parts, and the EMI is ₹10,583. Reducing: the same 9 percent is divided by 12 and charged each month on what is left, so the EMI from the standard formula is ₹9,540 and the interest over three years is ₹43,437.

    The reason is the balance. On the reducing loan you owe ₹3 lakh only in the first month; averaged over 36 months you owe ₹1,60,878, 53.6 percent of what you borrowed, and ₹43,437 is exactly 9 percent a year on that average for three years. The flat loan charges 9 percent on the full ₹3 lakh throughout, as though you had repaid nothing.

    ₹3,00,000 over 36 months, quoted at 9%
    Flat: interest (₹3,00,000 × 9% × 3)
    ₹81,000
    Flat: EMI (₹3,81,000 ÷ 36)
    ₹10,583
    Reducing: EMI
    ₹9,540
    Reducing: interest
    ₹43,437
    Same printed rate, extra interest on the flat loan
    ₹37,563

    Illustrative rate. Reducing-balance EMI uses the standard formula with the annual rate divided by 12. No processing fee in either case.

    • The flat EMI is ₹1,043 a month higher: the only difference most people see, and the smallest way of describing a ₹37,563 gap
    • Put the flat 9 percent loan beside a bank personal loan at an illustrative 14 percent reducing over the same 36 months. The bank's EMI is ₹10,253 and its interest ₹69,118, so the '9 percent' loan costs ₹11,882 more despite the lower number
    • Run the other way, a 14 percent reducing loan over three years is the same money as a flat 7.68 percent. A flat quote has to be below that to beat it

    Flat interest rate to reducing rate conversion

    The technique

    Solve for the rate by halving the gap

    There is no formula that turns an EMI back into a rate directly, which is why people fall back on a multiplier. A spreadsheet's RATE function does the job, and so does bisection by hand: guess a rate, compute the EMI, and halve the range each time according to whether the EMI came out too high or too low.

    The flat loan's EMI is ₹10,583.33. The question is which reducing rate produces that EMI on ₹3,00,000 over 36 months. Start with a range that must contain the answer: 9 percent is too low, because a reducing 9 percent gives ₹9,540, and 30 percent is far too high. Try the midpoint, compare the EMI with the target, and keep the half that still brackets it.

    Five tries narrow the range to about two-thirds of a point, and carrying on settles at 16.24 percent. That is what the flat 9 percent really charges, about 1.8 times the printed figure. In a spreadsheet the same answer is RATE(36, -10583.33, 300000) × 12.

    Bisection: which reducing rate gives an EMI of ₹10,583.33?
    Try 19.5%: EMI ₹11,072.79, too high
    Range 9% to 19.5%
    Try 14.25%: EMI ₹10,289.75, too low
    Range 14.25% to 19.5%
    Try 16.88%: EMI ₹10,677.16, too high
    Range 14.25% to 16.88%
    Try 15.56%: EMI ₹10,482.43, too low
    Range 15.56% to 16.88%
    Try 16.22%: EMI ₹10,579.54, just low
    Range 16.22% to 16.88%
    Continue to convergence
    16.24%

    Each EMI is ₹3,00,000 over 36 months on reducing balance at the rate tried. The midpoints are rounded for display.

    TenureFlat 9%: EMIReducing equivalentMultipleShortcut 2n/(n+1)
    12 months₹27,25016.22%1.8016.62%
    24 months₹14,75016.43%1.8317.28%
    36 months₹10,58316.24%1.8017.51%
    48 months₹8,50015.99%1.7817.63%
    60 months₹7,25015.71%1.7517.7%
    ₹3,00,000 at an illustrative 9 percent flat. The shortcut multiplies the flat rate by twice the months over the months plus one.
    • The multiple is not a constant. At 9 percent flat it moves between 1.75 and 1.83 across one to five years, and it shifts with the flat rate too: over 36 months a flat 6 percent converts to 11.08 percent (1.85 times) and a flat 12 percent to 21.2 percent (1.77 times)
    • The textbook shortcut of 2n/(n+1) overshoots, by 1.27 points at 36 months and 1.99 points at 60, because it ignores that interest on a reducing loan is front-loaded. A safe error, but an error
    • Convert on your own EMI, principal and months. The personal loan interest rates page runs the same conversion beside monthly-rate quotes, if that is the form your offer came in

    Fixed vs floating interest rate: a 50 bp rise

    Take a ₹30 lakh home loan over 180 months at an illustrative 8.5 percent floating. The EMI is ₹29,542. After 12 EMIs the balance is ₹28,96,524, and at that point the rate rises by 50 basis points, to 9 percent. There are two ways to absorb it.

    If the EMI rises and the end date stays, the new EMI over the remaining 168 months is ₹30,383: ₹841 more a month, a 2.85 percent increase. Total interest goes up by ₹1,41,211. If the EMI stays at ₹29,542 and the tenure stretches, the loan now needs 178 more months instead of 168, ten extra EMIs, and total interest goes up by ₹2,92,818. The same 50 basis points costs ₹1,51,607 more when it is absorbed by the tenure, because the balance is repaid more slowly and interest keeps running on it.

    After the rise at month 12EMI from month 13Months leftExtra interest
    No change, 8.5%₹29,542168None
    9%, EMI rises₹30,383168₹1,41,211
    9%, tenure extends₹29,542178₹2,92,818
    ₹30,00,000, 180 months, reducing balance, illustrative rates. Extra interest is against the no-change path over the whole loan.
    • A tenure extension is the change you do not feel, which is why it is the expensive one. If your reset letter extended the tenure, ask to raise the EMI instead, or make a part-payment that does the same job
    • Extensions get long quickly. A 100 basis point rise at the same point would add 22 months, against an EMI increase of ₹1,693. At 12.24 percent, 3.74 percentage points above the start, a ₹29,542 EMI would only cover the interest on ₹28,96,524 and the loan would stop shrinking
    • On a personal loan the same rise is small. ₹3 lakh over 36 months at an illustrative 13 percent floating has an EMI of ₹10,108; 50 basis points at month 12 lifts it to ₹10,158, ₹50 more, and costs ₹1,200 over the loan
    • What moves the benchmark behind a floating rate, and how quickly a change reaches your loan, is on the MCLR, EBLR and repo rate page

    Fixed or floating personal loan: the premium test

    The technique

    Price the fixed premium as a break-even rise

    A fixed rate is insurance against rates rising, paid for by a higher rate from the first EMI. The useful question is not 'will rates rise' but 'how big a rise, and how soon, would the premium pay for'.

    Keep the ₹30 lakh, 180-month home loan, and suppose the fixed option is priced at 9 percent, 50 basis points above the 8.5 percent floating rate (both illustrative). Fixed costs ₹24,77,040 in interest, at an EMI of ₹30,428. The floating loan, if nothing moves, costs ₹23,17,594: ₹1,59,446 less. Even with the full 50 basis point rise at month 12, absorbed by a higher EMI, floating is still ₹18,235 cheaper, because it paid the lower rate for a year first.

    The break-even is a rise of 56 basis points at month 12. If the rise comes later, the fixed loan needs more to catch up: 74 basis points at month 36, 103 basis points at month 60. Fixed wins clearly only on an early, large rise: 100 basis points at month 12 puts it ₹1,24,979 ahead.

    Floating path, change at month 12EMI afterInterest, whole loanAgainst fixed 9%
    No change₹29,542₹23,17,594₹1,59,446 cheaper
    Down 50 bp₹28,714₹21,78,420₹2,98,620 cheaper
    Up 50 bp₹30,383₹24,58,805₹18,235 cheaper
    Up 100 bp₹31,235₹26,02,018₹1,24,979 dearer
    ₹30,00,000, 180 months, floating from 8.5 percent, fixed at 9 percent, both illustrative. Rises are absorbed by the EMI, not the tenure.
    • For a personal loan the choice barely registers. ₹3 lakh over 36 months at an illustrative 13.5 percent fixed costs ₹66,501 in interest; at 13 percent floating with the same rise at month 12, ₹65,095. Fixed is ₹1,406 dearer over three years. Most personal loans are fixed for the whole tenure anyway, so there the decision is the rate and the fee
    • Fixed makes sense when the EMI already sits at the edge of what your income can carry. It is insurance: buy it because you could not absorb a higher EMI, not because you expect rates to rise
    • Read what 'fixed' covers. Some fixed-rate home loans are fixed only for an initial period and then move to floating, and prepayment terms can differ between the fixed and floating versions of the same loan. Both are in the agreement, not the advertisement

    Monthly vs annual compounding on a loan

    A reducing rate quoted per year is applied per month: 9 percent a year means 0.75 percent of the balance each month. Compounded over twelve months that is an effective 9.38 percent a year, 0.38 points above the quote. At 12 percent the effective figure is 12.68 percent; at the 16.24 percent hidden in the flat loan it is 17.51 percent. When EMIs are paid on time, each month's interest is cleared that month, so nothing compounds against you and the quoted annual rate is the right one to compare. Compounding bites when interest is left unpaid, as in a payment holiday: ₹3 lakh untouched for three years at 9 percent adds ₹88,509 compounded annually and ₹92,594 compounded monthly, ₹4,085 more.

    The other form of this question is the rest: how often the lender updates the balance it charges interest on. On monthly rests, each EMI reduces the principal straight away. On annual rests, a method some older home loans used, the balance is updated once a year, so a year of EMIs goes in while interest is still charged on the January balance.

    ₹30,00,000 over 15 years at 8.5%: monthly rest against annual rest
    Monthly rest: EMI
    ₹29,542
    Annual rest: yearly instalment ₹3,61,261, so EMI
    ₹30,105
    Monthly rest: total interest
    ₹23,17,594
    Annual rest: total interest
    ₹24,18,921
    Cost of the annual rest
    ₹1,01,327
    Annual-rest loan as a true monthly reducing rate
    8.82%

    Illustrative rate. The annual-rest EMI is one-twelfth of the yearly instalment on 8.5 percent over 15 years.

    • An '8.5 percent' home loan on annual rests is an 8.82 percent loan on monthly rests. The word 'rest' in the agreement is worth finding, because two identical headline rates can differ by ₹1,01,327
    • Most loans today charge interest on monthly or daily balances, so this is mainly a check for an older loan you still hold

    Why the KFS APR is the number to compare

    The technique

    One number that has already done the conversion

    Flat, reducing, annual rest and processing fee are four ways a quote can hide cost. The annual percentage rate is the regulator's answer: a single annual cost of credit that includes the interest and the lender's charges. Borrowers skip past it to the headline rate, the one number that has not been converted.

    RBI's circular on the Key Facts Statement for loans and advances, dated April 15, 2024, at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12663&Mode=0, defines the annual percentage rate as the annual cost of credit to the borrower, including the interest rate and all other charges associated with the credit facility. The KFS must carry a computation sheet for the APR and the repayment schedule, and charges the lender recovers for third parties, such as insurance or legal charges, must also be in the APR and shown separately. Any fee or charge not mentioned in the KFS cannot be charged at any stage of the loan without your explicit consent. The KFS must stay valid for at least three working days for loans of seven days or more, and the rules apply to retail and MSME term loans sanctioned on or after October 1, 2024, including fresh loans to existing customers. Credit card receivables are exempt, so a card balance converted to EMIs does not come with this statement; the card's own terms govern it.

    Here is why the APR fixes the comparison. Add an illustrative 1.5 percent processing fee plus 18 percent GST, ₹5,310, to each of the two ₹3 lakh offers from earlier, so ₹2,94,690 reaches your account. The rate that makes each EMI repay that cash over 36 months is the APR on the money you actually received.

    Two ₹3 lakh, 36-month offers, each with a ₹5,310 fee
    Headline: flat 9% against reducing 14%
    Flat looks cheaper
    Flat 9%: EMI ₹10,583, APR
    17.52%
    Reducing 14%: EMI ₹10,253, APR
    15.26%
    Flat 9%: interest plus fee
    ₹86,310
    Reducing 14%: interest plus fee
    ₹74,428

    Illustrative rates and fee. APR here is the reducing rate that repays ₹2,94,690 received with the EMI shown over 36 months. Your KFS states the lender's own computation.

    • The headline ranked the two offers backwards; the APR ranks them correctly, 2.26 points apart. Compare offers on the APR line of each KFS, never on the rate in the advertisement
    • The fee matters even without a flat quote. Remove it from the flat offer and it is still 16.24 percent, 0.98 points above the 14 percent loan with the fee. A method gap is usually larger than a fee gap
    • Ask for the KFS before you accept. Its validity period gives you days, not minutes, to set two offers side by side

    How Unyfy helps with the rate you actually pay

    Every conversion on this page needs three facts about a loan: the EMI, the months and the principal. For a loan you already hold, the EMI is the one you can stop estimating, because Unyfy reads it from your bank and card transaction emails and, on Android, transactional SMS, with no manual entry. Two capabilities build on it. It computes a blended rate across all your loans and cards, so a flat-rate vehicle loan, a personal loan and a card balance sit on one comparable figure instead of three conventions. And it flags a loan priced above what the same borrower would be offered today, and says whether switching is worth it after the fee; where the fee eats the saving, it says that too.

    Set those answers beside the method, reset terms and APR in your sanction letter and KFS. Unyfy is not a lender, and the lender sets a loan's terms. It never asks for your bank password or UPI PIN, and every payment is one you authorise. Install Unyfy on Android, or use the web app at app.unyfy.co.in on an iPhone.

    A quoted rate is a rate of something. On ₹3 lakh over 36 months, 9 percent flat is ₹81,000 of interest and 9 percent reducing is ₹43,437; the flat quote is really 16.24 percent, and loses to a 14 percent bank loan by ₹11,882. On a ₹30 lakh floating home loan, a 50 basis point rise costs ₹1,41,211 through the EMI or ₹2,92,818 through the tenure. A fixed premium of 50 basis points needs a rise of 56 basis points in the first year to pay for itself. The APR on the Key Facts Statement is the figure that has already done these conversions, so compare that.

    Informational page, not financial advice. The rates, fees and loans on this page are illustrative. Methods, reset terms, fees and APRs differ by lender and borrower; your sanction letter and Key Facts Statement govern, not this page.

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