How the Flat rate interest monthly Principal and Interest structure will be?

Hi, I have a query regarding flat rate of interest. Lets assume a loan of 50,00,000 is taken at 16.5% flat rate for a period of 5 years. So, total interest would be 41,25,000. Equating it to monthly EMI’s, it would be 1,52,083. Could please someone explain how the monthly principal and interest would be calculated? Will it be payments of 50,00,000/60 on principal and 41,25,000/60 on interest monthly equally. i.e.,
1st month – 83,333 principal + 68750 interest
2nd month – 83,333 principal + 68750 interest and so on.
When i preclose the loan, lets say after 12 months. Will my principal outstanding be 40,00,000? or will the banks during application say 16.5% flat rate interest, and to the total 90,00,000 while payment will they convert it to diminishing structure. i.e.,
1st month – 40,413 principal + 1,11,670
2nd month – 41,315 principal + 1,10,768 and so on so when i close after 12 months, my total principal outstanding would be 44,50,800. Can banks do in this way? Is it legal to say 16.5% flat rate upon application and later convert it to diminishing so as to gain financially on preclosure. Please advise. Thanks

Hi Sushanth,

Here’s the mathematical formula to calculate an EMI.

EMI= P x r x (1+r) ^n/ ((1+r) ^n – 1)

Here:

‘P’ is the amount that you want to borrow.

‘r’ is the rate of interest that is applicable on your loan. It is calculated on a monthly basis instead of the annual rate of interest.

‘n’ is the duration of the loan in terms of months.

Let’s take an example to calculate EMI using the above formula assuming the loan is Rs. 10, 00,000 at 9% p.a. for 15 years.

Principal amount = Rs. 10, 00,000

Monthly interest = 0.09/12 = 0.0075

N = 15 years, or 180 months

EMI = (10, 00,000 x 0.0075) x (10.0075) to the power of 180/ [(1 0.0075) to the power of 180]-1

Therefore your EMI = Rs. 10,142.67, which is a combination of both the interest and principal portion of the loan, to be paid each month.

If you opt for a floating interest rate, the interest rate on your loan will change whenever the new floating rate is reset by the lender. This will result in a change in your EMIs. However, if it is fixed rate, the EMI will remain the same for the period for which the rate applies.

Generally, the bank will offer fixed or flat rate of interest for a certain period like 3 or 5 years. This has nothing to do with calculating interest on the diminishing balance. Most Home Loans come with interest being charged on diminishing balance. But there are fixed rate loans where interest is based on the loan amount. We suggest that you check with your bank or the Home Loan contract for details. Banks cannot change the terms of the loan contract without informing you.

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Cheers,
BB Expert