21% is better than 12%. Surely, you must be joking!
Is that really ever true?
Yes, in case the 12% rate is being offered as Flat Rate to you whereas the 21% interest rate has been offered at a Reducing Balance calculation. If the reason is not clear to you, please read on.
What is a Flat Rate?
A Flat Rate is the same as Simple Rate of Interest that were all probably taught in grade 4 in Maths class. As an example, if you borrow 100,000 for 1 year at 12% then in total you pay back 12,000 as interest apart from the 100,000 principal amount.
Okay, but what is Reducing Balance Rate of Interest?
Reducing Balance rate is one where after every EMI that is repaid by the borrower, the remaining principal amount is considered for the interest calculation thus reducing the EMI’s Interest portion rather than considering the initial borrowed /principal amount.
The Reducing Balance can itself be calculated in many ways like Reducing Balance every month, every day etc.
FundsTiger is a FinTech company based out of Bangalore that offers connects Lenders and Borrowers for Business and Retail loans via its Lending Marketplace. FundsTiger’s vision is Democratization of Finance and we also help borrowers understand the financial implications of the various choices that they have so that they can decide and choose what’ s really best for them.