Analysing the interest rate

Absolute rate

Many people just take a look at the absolute rate that is quoted on a personal loan and then select the one that has a lower rate of interest. If you do this then there is a chance that you might not be making the right decision.

Nature of calculation

Along with the absolute rate it is important for you to consider the nature of the interest rate calculation. This will actually determine the final effective cost for you.

Flat rate interest

A flat rate interest that is charged on the loan will always be lower than a reducing balance interest rate in absolute terms. However, this does not necessarily mean that the flat rate will entail a lower overall cost but a specific working is required to arrive at the final effective cost.

Common base

There is a need to compare equivalents when it comes to the interest rates because otherwise the comparison will not be correct, and it will give a wrong picture. Converting a figure in one type of interest rate to the other for comparison is necessary for better utility.

Detailed analysis

Only after all the details pertaining to a loan are analysed will you be able to make the right decision with respect to a particular interest rate, its validity and appropriateness for you.