Flat interest rate vs Reducing balance interest rate
Flat interest rate:
Whenever you are taking loan (specially on credit card) you may be asked or by default will be charged flat interest rate instead of reducing balance.
Flat Rate of Interest basically means that interest is charged on full amount of the loan throughout the entire loan tenor. Thus the Flat Rate does not take account of the fact that periodic repayments, which include both interest and principal, gradually reduce the outstanding loan amount.
Example: If you take 1 lac for 3 years with 12% flat interest rate, you are actually paying effective interest rate of 21.2%. So, never get trapped with flat interest rate while taking loan.
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