Before delving into the details, let’s get a clarification on a few important terms:
- Principal amount: It is the initial amount of money one borrows in a loan, before any interest or fees are added.
- Interest rate: The interest rate is the percentage charged by the lender for borrowing the money, typically calculated annually keeping in mind about the principal amount. Your EMI is based on the principal amount, interest rate and tenure of the loan.
- Terms and conditions: This is an integral part of understanding business loan rates. There are a set of rules and requirements of the loan agreement, including repayment schedules, interest rates, and any additional fees.
Commonly, there are two types of Business Loan Interest Rates: Flat and Reducing interest rates.
What’s a Flat Rate of Interest?
A flat interest rate is a method of interest calculation where the rate is applied to the entire loan amount for the entire duration of the loan. This means that the interest rate, also known as the lending rate, remains unchanged throughout the loan’s term. The fixed interest rate is determined at the outset of the loan period and is consistently used to calculate the interest due over the life of the loan. Consequently, borrowers can expect their interest payments to remain stable and predictable, as they are calculated based on the initial principal amount, regardless of the outstanding balance as the loan progresses. This method provides clarity and simplicity for borrowers who prefer a straightforward repayment plan without the fluctuations that can come with other types of interest rate calculations.
What’s a Reducing Rate of Interest?
A reduced rate of interest typically refers to a lower or discounted interest rate offered by lenders under specific conditions or promotions. It represents a decreased percentage applied to the loan amount, resulting in lower overall interest expenses for borrowers. This reduced rate can be temporary, such as an introductory offer for new customers or during promotional periods, or it can be permanent for certain types of loans or for borrowers who meet specific criteria, such as having a high credit score or opting for certain repayment methods. The aim of a reduced interest rate is to make borrowing more affordable and attractive, encouraging potential borrowers to take out loans while potentially saving them money on interest payments over the loan term.
Flat Rate Vs. Reduced Rate
Let’s understand the concepts through two different scenarios:
Scenario 1: Flat Rate Loan
Loan Amount: ₹10,00,000
Tenure: 5 years
Flat Interest Rate: 10%
Interest Calculation: ₹10,00,000 * 10% = ₹1,00,000 annually. Over 5 years, you pay ₹5,00,000 in interest.
Scenario 2: Reducing Rate Loan
Loan Amount: ₹10,00,000
Tenure: 5 years
Reducing Interest Rate: 10%
Interest Calculation: In the first year, interest is ₹1,00,000. As you pay off the principal, the interest for subsequent years decreases, leading to total interest paid being less than ₹5,00,000 over 5 years.
At HFS, we offer Secured Business Loans to ensure flexible financial options to meet the requirements of each business. By ensuring assets such as collateral, we offer loans at competitive interest rates with extended repayment terms.
Secured Business loan interest rates don’t have to be confusing. Armed with this knowledge, you can make a smart choice and keep your business on the path to success.
