Flat vs Reduced Interest Rates: Smart Loan Choices to Avoid
Every morning should be peaceful, but don’t start with a heavy sigh wondering if it’s ‘debt day’. It is not a crime for a person to take a loan for a need. That loan should not exceed our credit. Do not exceed the interest limit, and if you open the door of non-banking institutions to the banks, remember that the interest burden is sure to be imposed!
Many people strongly desire to have a house of their own. Some save money and raise the funds required for the construction of a house. Others sell some of the property in the village and build a house in the city with that amount. Middle-class employees, however, have to rely on bank loans to buy a house!
A home loan can be considered a good loan. However, you should think about the personal loan. You should assess whether the loan is good and whether it will drown you. Generally, personal loans are given in reduced interest and flat interest modes. In both cases, the reduced interest method reduces the burden on the borrower. Almost all banks grant loans that follow this process. NBFCs (Non-Banking Financial Companies) also offer flat interest. (Flat vs Reduced Interest Rates: Smart Loan Choices to Avoid)
There is a difference between banks and NBFCs in the interest rate depending on the amount paid. In addition, the difference between reduced and flat methods is also significant. For example, suppose you have taken a loan of Rs 1 lakh from a bank under reduced interest. The monthly installment is Rs 3,000. After paying the installment for the first month, Rs 2,500 of it has gone towards interest, while Rs 500 has been deposited as principal. In the second month, interest is charged only on Rs 99,500. This means that as the months go by, the amount of interest in the installment we pay decreases. The principal amount increases. Now, coming to the flat method.. Suppose you have taken a loan of Rs 1 lakh for a period of five years at an interest rate of 10 percent! Interest per year is Rs. 10,000. For five years, Rs. 50,000. The amount of installment is determined by adding this interest amount to the principal. In this process, we also have to pay interest on the principal we have paid. As a result, an additional burden of 15 to 20 percent is imposed on the borrower. That is why. Priority should be given to taking a loan under the reduced method. Flat 10 percent is equal to 17 percent in the reduced method.(Flat vs Reduced Interest Rates: Smart Loan Choices to Avoid)
The reason is our mistakes.
Good Loan vs. Bad Loan: Know the Difference
Before jumping into a personal loan, ask yourself: Is this loan really helping me—or is it sinking me?
Personal loans usually come in two interest types:
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Reduced interest (also known as diminishing interest)
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Flat interest
Reduced interest is easier on the borrower. The EMI (Equated Monthly Installment) reduces as the principal amount decreases. Most banks offer loans on this basis.
In contrast, many NBFCs often provide flat interest loans, which can quietly increase your burden.
When there is a reduced method, why do we choose the second method that has a higher burden? You might ask! Our financial discipline causes us to make such a mistake. If the CIBIL score is not correct, the creditworthiness decreases. If we neglect to repay the loans taken in the past and pay the installments late, the required amount of debt does not arise in the banks. Due to this, we have to knock on the door of the NBFC thinking that it is okay even if the interest is high. NBFCs do not have all the conditions that are in the bank. The loan is sanctioned quickly. But, if there is a difference of up to Rs. 20 thousand for a loan of Rs. 1 lakh, this difference may not be covered in a lifetime. That is why, when taking a personal loan, banks should be given priority over NBFCs and other finance companies. A reduced interest policy should be chosen. Only then will such ‘loan’ situations not arise!! Flat vs Reduced Interest Rates: Smart Loan Choices to Avoid
Understanding the Margin Game :
NBFCs charge more than banks—usually 2 to 3.5% more. Why?
Let’s look at the net interest margin (NIM):
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Banks like SBI offer 5.5–6% on fixed deposits and lend at 7.5–9.5%.
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NBFCs offer up to 7% on deposits and lend at 10% or more to maintain their profit margin.
Also, NBFCs often use flat interest models—meaning even more out-of-pocket for you.
There is also a difference in interest rates between banks and NBFCs. They charge two to three and a half percent more than banks. Both banks and SBFCs determine interest rates based on the net interest margin. For example, public sector banks like SBI pay 5.5 to 6 percent interest on fixed deposits (FA). From this amount, they give loans to borrowers at an interest rate of 7.5 percent to 9.5 percent. The same NBFCs give interest up to 7 percent on FFs. Even if the net interest margin is assumed to be 3 percent, the interest on these loans is more than 10 percent. Moreover, since it is a flat interest, interest will have to be paid on the principal paid.(Flat vs Reduced Interest Rates: Smart Loan Choices to Avoid)
Let’s Break It Down with an Example:
Reduced Interest Method:
You borrow ₹1,00,000 from a bank. Monthly EMI is ₹3,000. In the first month:
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₹2,500 goes toward interest
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₹500 goes toward principal
Next month, you’re charged interest on ₹99,500, not the full amount. Over time, the interest component in your EMI reduces, and more of it goes toward clearing the principal.
Flat Interest Method:
Same ₹1,00,000 loan for 5 years at 10% interest per annum. That’s ₹10,000 interest every year—₹50,000 over 5 years.
Here’s the catch: You pay this full interest amount upfront, as if the loan balance stayed the same through the loan term. You even end up paying interest on the principal you’ve already repaid!
So even though the rate says “10%,” the real cost is closer to 17%. That’s why flat-rate loans are significantly more expensive in the long run.(Flat vs Reduced Interest Rates: Smart Loan Choices to Avoid)
Final Thoughts: Be a Smart Borrower
Loans are tools—they’re not the enemy. But how you use them makes all the difference. Before signing on the dotted line:
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Check the type of interest applied
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Compare offers from banks and NBFCs
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Prioritize financial discipline to maintain a healthy credit score
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Never choose convenience over long-term financial health
With the right awareness and choices, you can keep your mornings peaceful—and your wallet in good shape.(Flat vs Reduced Interest Rates: Smart Loan Choices to Avoid)
✨ About Me
Hi! I’m Manikanta Reddy, a passionate finance enthusiast with a strong understanding of money management, personal finance, and smart investment strategies. I believe financial literacy is the foundation of a secure and stress-free life — and I’m here to share practical insights, real-life examples, and simplified advice to help you make better financial decisions.
Whether it’s choosing between paying off a loan or investing, building emergency funds, or planning for retirement — I love breaking down complex topics into easy, actionable tips that anyone can follow.
Let’s learn, grow, and build wealth — the smart way. 💰(Flat vs Reduced Interest Rates: Smart Loan Choices to Avoid)
