What is difference between fixed interest rate and reducing interest rate?
Answers:
If it is 12% fixed for Rs10,000 loan, you have to pay Rs 100 every month as interest, till you pay back the principle amount.
If it is reducing, then every month, you have to pay both interest and a part of principle amount. If the EMI is for a period of 10 months. First month you have to pay 1000 + 120 = 1,200. In second month it is 1000 + 108 = 1,108 ( as the principle amont has reduced to Rs 9,000 ). In third month it is again 1,000 + 96 = 1,096. Here the as the loan amount has been reduced, by Rs 1,000 in every EMI, the interest is at the highest on First month, then it reduces during following months. In the 10th and last month you have to pay only 1,012 Rupees, to settle the account.
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