| These are mere myths which do more hurt than good for a borrower in terms of the total cost paid on the loan. Following are some of the common myths on loans and how you can guard yourself against being bustle into them.
A FLOATING INTEREST RATE LOAN IS BETTER THAN A FIXED INTEREST RATE LOAN A drifting interest rate loan is one wherein the applicable interest rate moves in sync with the interest rate movements in the economy. In case of a fixed interest rate loan, the interest rate stiff stable during a part of or throughout the tenure of the loan. A floating interest rate loan is highly good every time there is a fall in the ‘benchmark’ interest rate, i.e. the rate to which the floating rate is linked. In case of most lenders, the Prime Lending Rate (PLR) is the ‘benchmark’ rate against which they link the interest rate on all their term deposits and loan merchandise. Whenever the PLR rises or falls, the floating interest rate mirrors a similar movement. However, in a rising interest rate authorities, a floating interest rate loan might result in a higher adoption cost. Since interest rates have become explosive and irregular in the recent times, it is imperative mood to study the interest rate movement instead of blindly believing that floating interest rate loans are better than fixed ones simply because the interest rate attached to them is more often than not lower by 50 to 100 basis points. For a shorter term of office loan (such as a car loan, personal loan, etc.) a fixed rate might do more justice, particularly in a scenario of intensify rates. Then again, be sure about your lender’s definition of ‘fixed rate’ as it may be ‘fixed’ for only a part of the tenure of the loan.
MY 10 PER CENT LOAN IS THE SAME AS YOURS Apart from the interest rate, the method of scheming interest plays an essential role in determining the total interest cost payable on the loan. Lenders generally make use of the reducing balance method for impose interest on loans. Under this mechanism, interest is computed on the ‘principal outstanding’ on the loan. The principal amount outstanding on the loan reduces with every Equated Monthly Instalment (EMI) that you pay and therefore, the more frequently the interest is calculated, the lower is the total interest burden that you have to bear. Lenders calculate the interest payable either on a monthly, quarterly, half-yearly or annual reducing basis. The interest outgo on a ‘reducing balance’ loan would be highest under the annual-rest and lowest under the monthly-rest method. In short, in spite of two lenders offering an identical rate of interest, the total financing cost may differ greatly depending upon the method adopted for interest calculations.
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