What is The Difference Between Fixed and Decreasing Interest

What is The Difference Between Fixed and Decreasing Interest

How to make your best choice?

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Interest is the added percentage to any loan you take out from the bank. There are two types of interest: fixed and reducing, which differs in the way the monthly installments are calculated. However, at the end of the day, the percentage is more or less the same.

 

Fixed Interest

 

In this case, the monthly installments will be pre-determined and will not change. When you come to take out the loan, the interest is calculated and then the total amount of the loan is divided by the term of the loan.

 

Reducing Interest 

 

In this case, the installments differ according to the amount of money already paid off from the loan. It is calculated every month, and although the percentage remains the same, the amount of interest paid lessens as the outstanding balance is paid off.

 

In reducing interest, the installments differ according to the amount of money already paid off from the loan.

 

Advantages of Fixed Interest:

 

  • You know how much you will be paying every month
  • The percentage of interest might be less than the one offered on loans with decreasing interest.
  • It’s best if you are taking a small loan with a short term.
  • Total interest paid = loan principal * interest percentage * loan term.

 

Advantages of Reducing Interest:  

 

  • The amount of interest paid decreases over time.
  • Interest during the first year = loan principal * interest percentage * 12 months.
  • Interest after first year = (loan principal – amount paid) * interest percentage * 12 months.

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