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Ramalingam

Ramalingam Kalirajan  |11390 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jun 23, 2026

Ramalingam Kalirajan has over 26 years of experience in MF distribution and wealth management. He holds an MBA in Finance from the University of Madras and is a CFP (Certified Financial Planner) credentialed professional. He is the Director of Holistic Investment, a Chennai-based AMFI-registered Mutual Fund Distribution (ARN-4188) and APMI-registered PMS Distribution firm (APRN07386), helping clients build long-term wealth through mutual funds and other investment solutions.... more
sachin Question by sachin on Jun 13, 2026Hindi
Money

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/
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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At the same time, it is important to remember that no institution is perfect; every college has its own strengths and areas for improvement. The decision should therefore consider academics, campus environment, faculty interaction, placements, peer group, location and overall student experience.

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