Flat vs Diminishing Rate

How the interest rates are calculated in banks? Broadly speaking there are two types of Interest rates available in the banking sector.

1. Flat Interest rate

2. Diminishing Interest rate

Flat Interest rate:

An interest charge on the full amount of a loan throughout its entire term is known as Flat Interest rate.

For Example:

Take the following case

• Loan amount: Rs.100000
• Flat Int Rate: 10%
• EMI: Rs.2500
• Interest monthly outgo: 833.33
• Principal Monthly outgo: 1666.67
• Interest yearly out go: 10000
• Principal Yearly out go: 20000

Following table depicts the interest out go and the Rate of Interest actually they charge.

Year	Opening principal	Interest outgo	Principal outgo	Closing principal	Rate of Interest (in %)
Ist year	100000	10000	20000	80000	10
IInd year	80000	10000	20000	60000	12.5
IIIrd year	60000	10000	20000	40000	16.67
IVth year	40000	10000	20000	20000	25
Vth year	20000	10000	20000	Nil	50
Total		50000	100000		114.17%

So the actual amount we end up paying would be Rs.150000. So the actual interest rate charged is 22.83% (114.17/5)

Diminishing Rate of Interest:

Under Diminishing rate of interest the repayment is deducted (say every month) from the loan and the interest is charged only on the balance principal.

For Example: if instead of 10% p.a. flat rate (in the above example), interest is charged at 10% p.a. Diminishing balance rate, EMI amount would be Rs 2,124.70. You would pay Rs 833.33 as interest in the first month and Rs 1,291.37 (2,124.70 – 833.33) would be Principal Repayment. For next month interest will be charged only on reduced principal, i.e. 100,000 less 1,291.37 = 98,708.63. Interest for second month would be Rs 822.57 (98,708.63 * 10% / 12) and principal repayment would be Rs 1,302.13 (2,124.70 – 822.57). Thus over the tenure of the loan, you would end up paying Rs 127,482 (2,124.70 * 12 * 5).

10 Traits that make you rich

Understanding how personal traits can influence your finances is an essential ingredient for building wealth.

Here are 10 key traits:

1. Patience

Patience is one of the most important traits when it comes to saving money.

This
means waiting until the first wave of product hype has passed, keeping
a car for an extra few years before getting another one and waiting
until something you want fits into your budget instead of putting it on
credit.

Patience is often the difference between creating savings
and being in debt. Having the patience to wait until you find a good
deal is a cornerstone of good finances.

2. Satisfaction

When
you're satisfied, there is no reason to spend money on nonessentials.
The sole purpose of commercials is to make you believe that buying a
product or service will make you happier, wealthier, better looking or
improve whatever isn't bringing you satisfaction.

People spend
because they want to capture the excitement shown in advertisements.
When you are satisfied with what you have and your life (not trying to
live like those on TV), your finances will be in a lot better shape.

3. Organization

Being organized can make you more productive and ensure that all the many issues pertaining to personal finances are addressed.

It
means not paying late fees, not buying two of everything, knowing
deadlines that can affect your finances and getting more done in less
time. All these can greatly benefit your finances.

4. Discipline

You need the discipline to continue to save money for specific, long-term goals every month.

Personal finance isn't a way to get rich quick, but is a disciplined execution of your lifetime plans.

5. Reflectiveness

It's important to be able to look at your financial decisions and reflect on their results.

You're going to make financial mistakes. Everyone does.

The key is to learn from those mistakes so you don't make them again, or recognize if you keep repeating them.

6. Creativity

The economy and our earnings don't always match our expectations.

Unexpected
developments wreak havoc to elaborate financial plans. When this
happens, changes are needed to deal with the new circumstances.
Creativity is essential to accomplish this.

Creativity allows you
to make something last longer rather than purchasing it when you don't
have the money. It means juggling money to stay out of debt rather than
simply paying with a credit card. It means finding a cheaper
alternative when money is tight.

In these ways, creativity plays a large role in keeping finances in order.

7. Curiosity

Having curiosity helps you learn, study and improve yourself.

The
curiosity of wanting to know more, to take the time to study and then
take what is learned and put into practice is an important process that
is driven by curiosity.

8. Risk-Taking

To
build wealth, one needs to be willing to take risks. This doesn't mean
uncalculated risks. It means weighing all the options and taking
calculated risks when appropriate.

The stock market has risks
involved, but over the long term, history shows that it provides good
returns on money that is invested wisely. Those who fear risk
altogether end up saving money in accounts that likely lose money to
inflation in the long run.

9. Goal-Oriented

The
importance of setting and working toward goals is obvious. If you don't
know where you are going, it's difficult to get there. It helps your
personal finances immensely if you have money goals and are motivated
to reach the goals that you have set for yourself.

Those who lack goals don't have a road map to take them to the financial destination they want.

10. Hard- and Smart-Working:

Creating wealth and staying out of debt rarely comes about without a lot of hard work.

Many
people might hope that the lottery will solve all their financial
problems. The true path to financial freedom, however, is to work hard
to earn money while educating yourself to continue to have more value
and increase your salary.

You may not possess all of the above
traits. But knowing them can help you make changes so that you nourish
the ones that you have and obtain the ones you're missing

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