Types of interest rates on loans: what a quoted rate is a rate of

Every loan rate sits on both axes. The method decides how much interest a given rate produces; the movement decides whether that rate stays put. The same printed rate means different money on a flat, fixed loan and a reducing, floating one.

The table shows where each type usually turns up. That is common practice, not a rule: your sanction letter and Key Facts Statement state the method and whether the rate can move.

Take ₹3,00,000 over 36 months at an illustrative 9 percent, first flat, then reducing.

Flat: interest is the principal times the rate times the years, ₹3,00,000 × 9 percent × 3, which is ₹81,000. Add it to the principal and split the ₹3,81,000 into 36 equal parts, and the EMI is ₹10,583. Reducing: the same 9 percent is divided by 12 and charged each month on what is left, so the EMI from the standard formula is ₹9,540 and the interest over three years is ₹43,437.

The reason is the balance. On the reducing loan you owe ₹3 lakh only in the first month; averaged over 36 months you owe ₹1,60,878, 53.6 percent of what you borrowed, and ₹43,437 is exactly 9 percent a year on that average for three years. The flat loan charges 9 percent on the full ₹3 lakh throughout, as though you had repaid nothing.

The flat loan's EMI is ₹10,583.33. The question is which reducing rate produces that EMI on ₹3,00,000 over 36 months. Start with a range that must contain the answer: 9 percent is too low, because a reducing 9 percent gives ₹9,540, and 30 percent is far too high. Try the midpoint, compare the EMI with the target, and keep the half that still brackets it.

Five tries narrow the range to about two-thirds of a point, and carrying on settles at 16.24 percent. That is what the flat 9 percent really charges, about 1.8 times the printed figure. In a spreadsheet the same answer is RATE(36, -10583.33, 300000) × 12.

Take a ₹30 lakh home loan over 180 months at an illustrative 8.5 percent floating. The EMI is ₹29,542. After 12 EMIs the balance is ₹28,96,524, and at that point the rate rises by 50 basis points, to 9 percent. There are two ways to absorb it.

If the EMI rises and the end date stays, the new EMI over the remaining 168 months is ₹30,383: ₹841 more a month, a 2.85 percent increase. Total interest goes up by ₹1,41,211. If the EMI stays at ₹29,542 and the tenure stretches, the loan now needs 178 more months instead of 168, ten extra EMIs, and total interest goes up by ₹2,92,818. The same 50 basis points costs ₹1,51,607 more when it is absorbed by the tenure, because the balance is repaid more slowly and interest keeps running on it.

Keep the ₹30 lakh, 180-month home loan, and suppose the fixed option is priced at 9 percent, 50 basis points above the 8.5 percent floating rate (both illustrative). Fixed costs ₹24,77,040 in interest, at an EMI of ₹30,428. The floating loan, if nothing moves, costs ₹23,17,594: ₹1,59,446 less. Even with the full 50 basis point rise at month 12, absorbed by a higher EMI, floating is still ₹18,235 cheaper, because it paid the lower rate for a year first.

The break-even is a rise of 56 basis points at month 12. If the rise comes later, the fixed loan needs more to catch up: 74 basis points at month 36, 103 basis points at month 60. Fixed wins clearly only on an early, large rise: 100 basis points at month 12 puts it ₹1,24,979 ahead.

A reducing rate quoted per year is applied per month: 9 percent a year means 0.75 percent of the balance each month. Compounded over twelve months that is an effective 9.38 percent a year, 0.38 points above the quote. At 12 percent the effective figure is 12.68 percent; at the 16.24 percent hidden in the flat loan it is 17.51 percent. When EMIs are paid on time, each month's interest is cleared that month, so nothing compounds against you and the quoted annual rate is the right one to compare. Compounding bites when interest is left unpaid, as in a payment holiday: ₹3 lakh untouched for three years at 9 percent adds ₹88,509 compounded annually and ₹92,594 compounded monthly, ₹4,085 more.

The other form of this question is the rest: how often the lender updates the balance it charges interest on. On monthly rests, each EMI reduces the principal straight away. On annual rests, a method some older home loans used, the balance is updated once a year, so a year of EMIs goes in while interest is still charged on the January balance.

RBI's circular on the Key Facts Statement for loans and advances, dated April 15, 2024, at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12663&Mode=0, defines the annual percentage rate as the annual cost of credit to the borrower, including the interest rate and all other charges associated with the credit facility. The KFS must carry a computation sheet for the APR and the repayment schedule, and charges the lender recovers for third parties, such as insurance or legal charges, must also be in the APR and shown separately. Any fee or charge not mentioned in the KFS cannot be charged at any stage of the loan without your explicit consent. The KFS must stay valid for at least three working days for loans of seven days or more, and the rules apply to retail and MSME term loans sanctioned on or after October 1, 2024, including fresh loans to existing customers. Credit card receivables are exempt, so a card balance converted to EMIs does not come with this statement; the card's own terms govern it.

Here is why the APR fixes the comparison. Add an illustrative 1.5 percent processing fee plus 18 percent GST, ₹5,310, to each of the two ₹3 lakh offers from earlier, so ₹2,94,690 reaches your account. The rate that makes each EMI repay that cash over 36 months is the APR on the money you actually received.

Every conversion on this page needs three facts about a loan: the EMI, the months and the principal. For a loan you already hold, the EMI is the one you can stop estimating, because Unyfy reads it from your bank and card transaction emails and, on Android, transactional SMS, with no manual entry. Two capabilities build on it. It computes a blended rate across all your loans and cards, so a flat-rate vehicle loan, a personal loan and a card balance sit on one comparable figure instead of three conventions. And it flags a loan priced above what the same borrower would be offered today, and says whether switching is worth it after the fee; where the fee eats the saving, it says that too.

Set those answers beside the method, reset terms and APR in your sanction letter and KFS. Unyfy is not a lender, and the lender sets a loan's terms. It never asks for your bank password or UPI PIN, and every payment is one you authorise. Install Unyfy on Android, or use the web app at app.unyfy.co.in on an iPhone.