Rank: Member Joined: 8/3/2011 Posts: 197
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mwekez@ji wrote:2012 wrote:mwekez@ji wrote:The beauty of a reducing balance rate pegged to base rate is that when base rate go down, the instalments will follow. Flat rate remains that for the whole tenor of the loan Please explain that. I don't get how that affects anything. I say this because when the rate goes up you just pay more to the interest and less to principal reduction. For example If you were paying Interest: 20,000 Principal: 18,000 you find you're paying something like Interest: 30,000 Principal: 13,000 Whether reducing or not, you'll find that you are still left with a very high principal to repay. Or am I not getting it right? @2012, Your figures sound like of a loan that has been completely restructured because they do not fit in Equated Monthly Instalments (EMI) or non EMI. When interest rates change, it’s the interest payment component that changes. Under EMI (which is what I gave in post 32), the instalments include both the principle and interest payment and so when rates change, you have to similarly change the monthly instalment if you intend to retain the same repayment period. Otherwise, you have to vary the repayment period if you intend to retain the same monthly instalment (like what most banks offered its customers to avoid defaults when rates shot above the roof). When rates go down it becomes a sweet song. In flat rate loans, it’s a different story. @Mwekezaji, I would like to hear the different story (flat rate). What happens when the interest rate rises or falls? "..one is only poor only if they choose to be.."-Dolly Partron
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