## Choosing Between Loan Interest Rates – Reducing Balance Or Flat Rate Method

| Comments Off on Choosing Between Loan Interest Rates – Reducing Balance Or Flat Rate Method

# UNDERSTANDING LOAN INTEREST RATE CALCULATIONS

When getting a loan, one of the most important things to look out for is the interest rate because this is what determines how much you pay back at the end of the day, however, a lot of people still get it wrong when picking between loan offers because they do not understand it. Lets take the case of Wale for example.

Wale’s rent is due and he needs a loan quickly to keep his landlord from kicking him out but wale wants a loan that will be favourable to his salary. After searching and researching, he has two loan offers on his hands, N600,000 each with same tenure (loan period) and requirements but there was a big difference, Bank A offered him the loan at 4% flat interest rate on a monthly basis while Bank B offered 6% monthly on a reducing balance interest rate. It was an easy decision for wale, Bank A he thought, this would definitely guarantee he pays back the lesser amount on the N600,000. To Wale, he was getting the best deal possible.

In reality however, with Bank A‘s offer Wale will eventually pay back about N888,000 while he would have had to paid back about N860,000 with Bank B‘s offer but  Wale fell victim to not understanding the fine print and many loan seekers are still falling victim to this very technicality. You’re in luck because in this article, your ignorance will be put to the sword once and for all.

# WHAT IS A FLAT INTEREST RATE

When using a flat rate method for calculating interest on a loan, the interest is paid on the amount borrowed monthly/yearly/quarterly (as the case may be) without taking into consideration repayments being made. In other words, the principal remains constant throughout the loan duration.

In the case of Wale, to repay N600,000 in 12 months, there would have to be deposits of N50,000 for each month (without considering interest). A 4% flat interest rate on N600,000 would mean he pays an interest of N24,000 monthly (4% of N600,000) and N288,000 totally in interest. His total monthly repayment will then be N74,000 (N50,000 + N24,000). Sadly, most loan seekers are only aware of this type of interest calculation.

# WHAT IS A REDUCING BALANCE INTEREST RATE

On the hand, a reducing balance interest rate method takes into consideration your loan repayments. What does this mean exactly you may ask, it simply means the interest is calculated on the balance after each repayment and not on the amount borrowed. The principal reduces as repayments are made.

In Wales case of 6% monthly on a reducing balance for N600,000, the interest he will pay for the first month will be 6% of N600,000 which is N36,000. The second month’s interest will not be calculated on N600,000 but will ideally be calculated on N550,000 and the third month calculated on N500,000 (the balance keeps reducing  by N50,000 because that is what is needed to repay N600,000 12 times).

His total first month repayment would be N86,000 (N50,000 + N36,000) and the subsequent monthly installments keep reducing as the loan balance reduces. This definitely seems very complicated and loan seekers will find it difficult to keep up if they have to pay a different amount every month and that is where an EMI (Equal Monthly Installments) formula comes in. A reducing balance EMI formula is used to calculate loans on a reducing balance method so as to achieve equal monthly installments. There is no universal reducing balance EMI formula (Every financial institution has theirs) thus you usually have to ascertain your monthly repayment from the institution before you collect a loan.

In Creditville Limited, we have a unique reducing balance loan calculator that is extremely customer friendly making us the best when it comes to low interest loans available in Nigeria. If Wale had taken a N600,000 loan for 12 months at 6% on a reducing balance from Creditville, his monthly installment would have been N71,522.22 which is much less than the N74,000 he would pay for the same amount at a 4% flat interest rate.

In conclusion, interest rates are a delicate subject that every loan seeker should pay attention to and the fine print should be read dutifully. On average, loans on a reducing balance are better than those calculated on a flat rate because the reducing balance method is the true reflection of how the loan will be serviced.

## Things to consider before standing as a Loan Guarantor

Who is a Loan Guarantor A guarantor is a person or entity that agrees to be responsible for ...

## 9 Easy Ways to Repay your loan Quickly and Early

Why should you Pay Off Your Loan Quickly? There are many benefits to paying off a loan ...

## 9 Reasons Why You Should Start A Side Hustle Today!

What Exactly is A Side Hustle A side Hustle, also known as a side gig or side line is a way to ...

## Does My Business Really Need a Loan?

Getting a Business Loan Can Be a Good Thing In order for a company to expand, sometimes taking ...

## Choosing Between Loan Interest Rates – Reducing Balance Or Flat Rate Method

UNDERSTANDING LOAN INTEREST RATE CALCULATIONS When getting a loan, one of the most important ...

## 8 Reasons To Stop Borrowing Money From Friends and Family

Have you ever had pressing issues or been so cash-strapped that you resorted to borrowing money ...

## Taking a Loan for Your Wedding is not a Bad Idea

Should you get a wedding Loan? This means you'd be covering your wedding costs with money you ...

## What are Credit Checks and why are they Important?

What are Credit Checks Credit check is the act of checking one’s credit score and general ...

## How to make the best use of a Loan

How to make the best use of a loan It is often easy to think that a loan is not a loan and it ...

## Why you should choose investments over savings

Why you should choose investments over savings Saving is simply defined as income not spent or ...

## How loan companies are driving economic growth in Nigeria

How loan companies are driving economic growth in Nigeria We live in a country where 1 dollar ...

## Things To Consider Before Accepting a Loan Offer

Things to consider before accepting a loan offer Before taking a loan, several things need to ...

## Things to consider before standing as a Loan Guarantor

| Comments Off on Things to consider before standing as a Loan Guarantor

Who is a Loan Guarantor A guarantor is a person or entity that agrees to be responsible for another’s debt or performance under a contract, if the other fails to pay or perform. In this context, a guarantor is a person who guarantees to pay for someone else’s debt if he or she should default […]

## 9 Easy Ways to Repay your loan Quickly and Early

| Comments Off on 9 Easy Ways to Repay your loan Quickly and Early

Why should you Pay Off Your Loan Quickly? There are many benefits to paying off a loan quickly. You save money on your loan interest and improve your credit rating. Good Credit is incredibly important in securing a new loan. Banks or financial institutions often look at previous loan payment history before giving out loans […]

## 9 Reasons Why You Should Start A Side Hustle Today!

| Comments Off on 9 Reasons Why You Should Start A Side Hustle Today!

What Exactly is A Side Hustle A side Hustle, also known as a side gig or side line is a way to make some extra cash that allows you flexibility to pursue what you’re most interested in. It can also be your true passion – a chance to delve into fashion, travel or whatever it […]

## Does My Business Really Need a Loan?

Getting a Business Loan Can Be a Good Thing In order for a company to expand, sometimes taking a business loan is necessary. While it’s true that not every reason is a good reason to go into debt for your business, that doesn’t mean that good reasons don’t exist. If your business is ready to […]

## Choosing Between Loan Interest Rates – Reducing Balance Or Flat Rate Method

| Comments Off on Choosing Between Loan Interest Rates – Reducing Balance Or Flat Rate Method

UNDERSTANDING LOAN INTEREST RATE CALCULATIONS When getting a loan, one of the most important things to look out for is the interest rate because this is what determines how much you pay back at the end of the day, however, a lot of people still get it wrong when picking between loan offers because they […]

## 8 Reasons To Stop Borrowing Money From Friends and Family

| Comments Off on 8 Reasons To Stop Borrowing Money From Friends and Family

Have you ever had pressing issues or been so cash-strapped that you resorted to borrowing money from your friends or the thought of borrowing from a friend came to mind? Borrowing from friends most times seem like the best idea. Your friend is not a financial institution, there would be no hassles of documentation, there […]

## Taking a Loan for Your Wedding is not a Bad Idea

Should you get a wedding Loan? This means you’d be covering your wedding costs with money you don’t have, be it from a personal loan or a credit card. This is a decision to make with your partner, because it’ll affect on your marriage later. It’s important to talk about whether or not that financial […]

## What are Credit Checks and why are they Important?

| Comments Off on What are Credit Checks and why are they Important?

What are Credit Checks Credit check is the act of checking one’s credit score and general credit history. Credit score is a numerical expression based on a label analysis of a person’s credit files to represent the creditworthiness of an individual. A credit score is primarily based on a credit report information typically sourced from […]

## How to make the best use of a Loan

| Comments Off on How to make the best use of a Loan

How to make the best use of a loan It is often easy to think that a loan is not a loan and it is free money. Once it hits your account, several thoughts may go through your mind. Using your loan wrongly is “carrying gbese” on your head because once the debt collectors come […]

## Why you should choose investments over savings

| Comments Off on Why you should choose investments over savings

Why you should choose investments over savings Saving is simply defined as income not spent or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recurring costs. In terms of personal finance, saving […]

## How loan companies are driving economic growth in Nigeria

| Comments Off on How loan companies are driving economic growth in Nigeria

How loan companies are driving economic growth in Nigeria We live in a country where 1 dollar as at today is equivalent to 361 Naira. Over the past three to four years, Inflation has been inconsistent (increasing and decreasing). To better understand inflation, it is a sustained increase in the price level of goods and services in an economy […]

## Things To Consider Before Accepting a Loan Offer

| Comments Off on Things To Consider Before Accepting a Loan Offer

Things to consider before accepting a loan offer Before taking a loan, several things need to be put into consideration. They need to be considered because taking a loan could be detrimental to your image if you have problems with repayment. Taking a loan that is best suitable for you would enhance your ability to pay […]