Interest Rate
The percentage charged by a lender on the borrowed amount, expressed per annum.
Apply for a LoanWhat is Interest Rate?
Interest rate is the percentage of the outstanding loan amount that a lender charges as the cost of borrowing, typically expressed as an annual percentage (p.a.). In India, loan interest rates are either fixed (constant throughout tenure) or floating (changes with market rates linked to RBI repo rate or MCLR). The interest rate directly determines your EMI — a lower rate means lower monthly payments and less total interest paid over the loan tenure.
Example
₹25 Lakh home loan for 20 years: at 8.5% p.a. EMI = ₹21,696 and total interest = ₹27 Lakh. At 10% p.a. EMI = ₹24,126 and total interest = ₹33 Lakh. The 1.5% rate difference costs ₹6 Lakh extra over 20 years.
Frequently Asked Questions
What is the difference between fixed and floating interest rate?
A fixed interest rate stays the same throughout the loan tenure — your EMI never changes regardless of RBI rate decisions. A floating rate changes with market benchmarks (RLLR, MCLR, repo rate) — your EMI or tenure changes when rates move. In India, most home loans are floating rate. Fixed rates are typically 0.5–1% higher than floating rates initially but provide certainty. When RBI is raising rates (rate hike cycle), fixed is better; when rates are expected to fall, floating is better.
What is the reducing balance method for interest?
In the reducing balance method (used by all Indian banks/NBFCs), interest is calculated on the outstanding principal balance each month, not the original loan amount. As principal reduces each month, the interest component of the EMI decreases. This is different from the flat rate method (used by informal lenders), where interest is charged on the original principal throughout — making the effective rate much higher (a flat rate of 9% ≈ 16–18% reducing balance).
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