Classification of personal loans based on type of interest

Loans are generally taken in case any person is in requirement of money which he or she cannot raise personally. In such situation people can approach a bank or other private financiers for a loan where money is lent and should be returned over a specific period of time along with a little extra called interest. Personal loans are generally the most common type of loans people opt for since this type of loan can be used for any personal reason. Personal loans can be used to finance any personal requirement like purchasing home appliances, funding children’s education or marriage, to renovate a home or purchase assets other than home or land, etc.

All banks in India provide personal loans and hence when looking for a personal loan there are some factors that have to be considered. Basically, the interest rate is the primary factor that has to be considered when looking for a personal loan. Generally, the rate of interest charged for personal loans ranges from 12 to 15% but the way of obtaining the interest can be of three different types. And hence depending on the type of interest personal loans are of three types:

Fixed interest personal loan

This is the most common and primitive method of charging interest for a personal loan. According to this method the amount of interest charged is fixed throughout the personal loan tenure. Hence, all thorough the loan tenure you pay the same amount of interest every month. This way you will be actually paying more money as compared to the other types.

Reducing interest personal loan

In this type the amount of interest paid every month reduces from the beginning of the loan tenure to the end. In this method the borrower is to pay a part of the principle borrowed every month plus interest. And since a part of the principle borrowed is paid every month, the interest calculated for the next month only takes into consideration the principle that is to be paid. Hence, the interest paid keeps reducing until it becomes nil in the final month of the loan tenure. This is perhaps the best type of personal loan from the borrower’s point of view.

Fluctuating interest personal loan

In this type of personal loan the rate of interest isn’t fixed rather it changes with the market. The risk factor involved in this type of loan is huge since the rate of interest keeps changing and it cannot be predicted whether it will increase or decrease. In case the rate of interest decreases it is advantageous for the borrower but until now there has only been an upward trend.

These are some of the different types of personal loans based on the type of interest paid by the borrower. Looking at all the above types it is obvious that the reducing interest personal loan is the best type to opt for from the borrower’s point of view. And this type of personal loan is provided by all banks in India.