Home Loan Rates - Beware of Arithmetical Jugglery.

Different banks quote there interest rates differently. Some might quote rates with an annual rest, while others may quote rate with a monthly rest.

In the case of a monthly rest with 1 per cent interest being charged per month, the annualized rate = 1 percent * number of months in a year = 12 percent.

Interest rates can be calculated at a flat rate keeping the outstanding amount (i.e., the amount on which interest is calculated) constant thought the loan tenure or at a reducing balance rate, which lowers the outstanding amount as the loan is paid back.

What is flat Rate?
If you took a loan of Rs. 10000 with a flat rate of interest of 10 percent over five years, than you would pay Rs. 2000 + Rs. 1000 (i.e. 10 percent of the loan) = Rs. 3000 every year. Over the tenure of the loan, you would end up paying Rs. 15000.

What is reducing balance rate?
If instead of a 10 percent flat rate (in the above example), you were charged a 10 percent annual reducing balance rate, you would pay Rs. 1000 as interest in the first year, Rs. 800 as interest in the second year Rs. 600 as interest in the third year Rs. 400 as interest in the forth year and by the last year you would only pay Rs. 200 as interest. That is, over the tenure of the loan you would end up paying Rs. 13000 i.e. Rs. 2000 less than you would have paid with the 10 percent flat rate.

What is 'rest'?
The term "rest" comes into the picture only for reducing balance loans. In a reducing Balance loan with each EMI paid, the outstanding Loan amount is recalculated. A rest is the period in which the bank recalculates the loan amount outsanding based upon the the amount of loan paid back through Equated monthly installments, i.e. EMIs.

Annual Rest: The Bank recalculates the outstanding loan amount at the end of 12 months. That is even though the borrower pays his EMI every month and the loan balance reduces every month, the outstanding loan amount is not adjusted till the end of the year.

Monthly Rest: The bank recalculates the outstanding loan amount at the end of each month. That is, the outstanding loan amount on which the interest is charged goes down every month.

Annualized interest Rate = 12% Loan tenure in months = 240 Loan amount = Rs. 500000
Type of Interest Rate	Annual Rest	Monthly Rest
Number of compounding period	20	240
Interest rate in each compounding period	12 percent	1 percent
EMI	Rs. 5578	Rs. 5505
Total Interest Paid	Rs. 838788	Rs. 821303

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