Loans come with a vocabulary that nobody explains. APR, reducing balance, amortization schedule, moratorium — these aren't just jargon, they're the difference between paying ₹20 lakh in interest or ₹35 lakh for the same loan.
These 15 questions cover what borrowers actually need to know.
Loading comments...
Interest rate is the cost of borrowing the principal. APR (Annual Percentage Rate) includes the interest rate PLUS all fees (processing fee, documentation charges, insurance). A loan advertised at 8.5% with 1% processing fee has an APR of ~9.5%. Always compare APR, not just interest rate — it's the true cost of the loan.
Reducing balance means interest is calculated on the outstanding principal each month, not the original loan amount. As you repay, the principal shrinks, so interest shrinks too. All Indian banks use this method. Example: On ₹10L at 10%, first month interest = ₹8,333 (on ₹10L). After paying ₹1L principal, next month interest = ₹7,500 (on ₹9L).
Flat rate calculates interest on the original principal for the entire tenure, regardless of repayments. A ₹10L loan at 10% flat for 5 years = ₹5L total interest. The same loan at 10% reducing balance = ₹2.75L interest. A 10% flat rate equals approximately 17.5% reducing balance. Some car dealers and NBFCs quote flat rates to make offers look cheaper.
RBI's repo rate is the rate at which it lends to commercial banks. When repo rate increases, banks raise their lending rates (usually within 1-3 months). Floating-rate loans (most home loans) are directly affected. Fixed-rate loans (personal, car) are not affected during the loan tenure. If RBI cuts repo rate by 0.5%, your floating-rate EMI should decrease — but banks often delay passing on the benefit.
EMI = P × r × (1+r)ⁿ ÷ [(1+r)ⁿ − 1], where P = principal, r = monthly interest rate, n = total months. Example: ₹20L at 9% for 15 years = ₹20,293/month. Use the [Loan EMI Calculator](/loan-emi-calculator) for instant results with any combination of amount, rate, and tenure.
Most of your EMI goes toward interest, not principal. In Year 1 of a ₹25L home loan at 8.5% for 20 years, about 80% of each EMI is interest. By Year 15, it reverses — 70% goes to principal. This is why early prepayment saves the most money: you're eliminating years of high-interest payments at the end of the loan.
Almost always reduce tenure. A ₹5L prepayment on a ₹25L home loan: reducing tenure saves ₹6.4L in interest; reducing EMI saves ₹5.2L. You save ₹1.2L more by cutting the tenure. The only reason to reduce EMI is if you're struggling with monthly cash flow.
For floating-rate loans, EMI changes when interest rates change (banks usually adjust tenure first, then EMI). For fixed-rate loans, EMI stays constant. You can request a restructuring to change EMI, but banks charge a fee and may require fresh documentation. Some banks offer step-up/step-down EMI plans at the time of loan origination.
A month-by-month breakdown showing how each EMI splits between interest and principal, and the remaining balance after each payment. The [Loan EMI Calculator](/loan-emi-calculator) generates a full amortization schedule automatically. It's essential for tracking how much principal you've actually repaid — the number is always lower than you think in the early years.
For a ₹25L loan at 8.5% for 20 years: After 5 years, you've paid ₹7.6L in principal (30% of loan) but ₹15.7L in interest. After 10 years, principal paid = ₹19.3L (77%) and interest = ₹24.8L. The early years are interest-heavy. Use the [Loan EMI Calculator](/loan-emi-calculator) amortization table to see your exact position.
When your payment is less than the interest due, the unpaid interest gets added to the principal — your loan balance increases instead of decreasing. This happens with some adjustable-rate mortgages and interest-only loans. Indian banks generally don't offer negative amortization products, but be careful with NBFC top-up loans where EMI covers only interest.
RBI prohibits banks from charging prepayment penalties on floating-rate home loans. For fixed-rate home loans, banks may charge 2-4% of the prepaid amount. Personal loans and car loans often carry prepayment penalties of 2-5% after a lock-in period (typically 6-12 months). Always check the loan agreement before prepaying.
Any prepayment helps, but a good rule: prepay at least one month's principal. For a ₹25L loan at 8.5%, the principal portion in Month 1 is ₹4,091. Prepaying ₹50,000 in Year 1 saves approximately ₹1.5L in future interest. Prepaying ₹5L in Year 1 saves ₹6.4L. The earlier you prepay, the more each rupee saves.
After full repayment, collect: (1) No Objection Certificate (NOC) confirming the loan is closed, (2) Original property documents (for secured loans), (3) Loan closure letter with final payment details, (4) Updated CIBIL report showing the loan as 'Closed.' Without the NOC, the loan may still show as 'Active' on your credit report, affecting future borrowing.