Often while taking a loan, Relationship Managers quotes flat rate of interest. Now it is important to know that what is flat rate of interest and how it is different from reducing rate of interest. Let us understand this Flat rate of interest.
There are known to exist two diverse kind of interest rates and they are fixed or flat and the other being variable. The flat rate of interest implies that the repayment for a particular loan needs to be made in preset or unchanged equal form of installments for the total loan period. The interest rate charged in such a case would remain unaltered irrespective of the market variations. Through the initial loan period, a greater part of the sum paid each month is employed to service interest whereas, the principal is serviced during the later tenure period.
There are a few specific advantages associated with flat interest rate. In such form of interest, the rate usually continues to stay flat or unchanged and is not reliant on the market conditions. This kind of interest rate is deemed to be appropriate for individuals who prefer financial planning and displays an inclination towards a flat repayment mode on a monthly basis. Flat interest rates are also known to offer a feeling of security as well as assurance.
However, certain negative aspects have been identified with regard to flat interest rate. The chief drawback refers to the fact that these interest rates are generally learnt to be higher in comparison to variable rates. The option of flat interest rate fails to offer a slash on the rate to the borrower in case of any trim down in the interest rate.
Therefore, it can be well inferred from the discussion that flat interest rates should be opted if there exists a likelihood of boost in interest rates.
