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Ramalingam Kalirajan11243 Answers |Ask - Follow
Mutual Funds, Financial Planning Expert - Answered on Jun 23, 2026
Asked on - Jun 13, 2026
i wanted to know I am taking 2 wheeler loan and loan amount is 275000 for 5 years. The bank has offered me 8.5% flat interest rate & 16% reducing rate which one should i prefer taking into consideration of prepayment
Ans: It is good that you are comparing the loan options before signing the agreement. Most borrowers only look at the EMI and miss the actual cost of borrowing.
» Understanding Flat Rate Vs Reducing Rate
– In a flat-rate loan, interest is calculated on the original loan amount throughout the tenure.
– In a reducing-balance loan, interest is charged only on the outstanding balance.
– As your principal reduces every month, the interest amount also reduces.
– Therefore, comparing 8.5% flat with 16% reducing only by looking at the percentage can be misleading.
» If You Plan To Prepay
– The reducing-balance method is generally more favourable.
– Every prepayment directly reduces the outstanding principal.
– Future interest is then calculated on the lower balance.
– This means you get a real benefit from prepayment.
– In a flat-rate structure, the benefit of prepayment is often lower because the interest calculation is based on the original loan amount.
» What You Must Check Before Deciding
– Is there any prepayment penalty?
– Is part-prepayment allowed?
– After prepayment, will EMI reduce or tenure reduce?
– Are there any processing fees or hidden charges?
– What is the total repayment amount under both options?
Sometimes a lower-looking interest rate can result in a higher total cost because of the way the loan is structured.
» My View As A Certified Financial Planner
– If you are reasonably sure that you will prepay the loan within a few years, the reducing-balance option generally deserves preference.
– It rewards early repayment.
– It provides greater flexibility.
– It usually reflects the true outstanding liability more fairly.
» One More Thought
– A two-wheeler is a depreciating asset.
– Therefore, if your cash flow permits, try to close the loan faster than the original tenure.
– Reducing debt early on depreciating assets improves your overall financial health.
» Finally
– Based purely on the information provided and considering your intention to prepay, I would lean towards the reducing-balance option rather than the flat-rate option.
– However, before signing, ask the bank for the total repayment schedule and prepayment rules of both options.
– The best choice is the one with the lower total borrowing cost and greater flexibility for early closure.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.linkedin.com/in/ramalingamcfp/
(more)
» Understanding Flat Rate Vs Reducing Rate
– In a flat-rate loan, interest is calculated on the original loan amount throughout the tenure.
– In a reducing-balance loan, interest is charged only on the outstanding balance.
– As your principal reduces every month, the interest amount also reduces.
– Therefore, comparing 8.5% flat with 16% reducing only by looking at the percentage can be misleading.
» If You Plan To Prepay
– The reducing-balance method is generally more favourable.
– Every prepayment directly reduces the outstanding principal.
– Future interest is then calculated on the lower balance.
– This means you get a real benefit from prepayment.
– In a flat-rate structure, the benefit of prepayment is often lower because the interest calculation is based on the original loan amount.
» What You Must Check Before Deciding
– Is there any prepayment penalty?
– Is part-prepayment allowed?
– After prepayment, will EMI reduce or tenure reduce?
– Are there any processing fees or hidden charges?
– What is the total repayment amount under both options?
Sometimes a lower-looking interest rate can result in a higher total cost because of the way the loan is structured.
» My View As A Certified Financial Planner
– If you are reasonably sure that you will prepay the loan within a few years, the reducing-balance option generally deserves preference.
– It rewards early repayment.
– It provides greater flexibility.
– It usually reflects the true outstanding liability more fairly.
» One More Thought
– A two-wheeler is a depreciating asset.
– Therefore, if your cash flow permits, try to close the loan faster than the original tenure.
– Reducing debt early on depreciating assets improves your overall financial health.
» Finally
– Based purely on the information provided and considering your intention to prepay, I would lean towards the reducing-balance option rather than the flat-rate option.
– However, before signing, ask the bank for the total repayment schedule and prepayment rules of both options.
– The best choice is the one with the lower total borrowing cost and greater flexibility for early closure.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.linkedin.com/in/ramalingamcfp/