What is “rest” in a home loan?
Financial institutions have various
parameters surrounding the loan amount detailing the manner in which the loan
is repaid. A “Rest” is nothing but the regular interval at which the loan
amount balance is recalculated and also refers to the periodicity of
compounding. This can be possible only in the case of reducing balance loan
amounts.
These regular intervals or Rests can be yearly, monthly or even daily.
A yearly rest or an annual rest
would mean that even when you pay EMIs on a monthly basis on your loan, the
loan amount based on which you pay the interest, will be recalculated only at
the end of the year(12 months). This means you would continue to pay interest
on the entire loan amount , even when the outstanding loan amount reduces each
month.
In the case of a monthly rest, the
balance loan amount is recalculated and decreases every month. Hence it is to
the advantage of the loan consumer to take up rest that more closely matches
the frequency of his loan repayment. So if you are repaying your loan amount on
a monthly basis, take up the option of a monthly rest. Banks generally charge
an “annualized” interest rate, which is converted accordingly to a monthly rest
or daily rest.
Here is a simple illustration that
shows you that the interest rate on a monthly rest is lesser than that of an
annual rest. Take two instances, where you borrow Rs. 20 lakh at a 10%
annualized interest rate (which is obtained by multiplying the rate per rest
period into the number of rests per year), where in one case the rate has
annual rests and in the other case it has monthly rests.
Annualized interest rate |
10% |
|
Loan tenure in months |
240 |
|
Loan amount |
Rs.
10,00,000 |
|
Type of Interest Rate |
Annual
Rest |
Monthly
Rest |
Number of compounding periods |
20 |
240 |
Interest rate in each compounding period |
10.00% |
0.83% |
EMI |
Rs.
9,788 |
Rs.
9,650 |
Total interest paid |
Rs.13.5
L |
Rs.13.2
L |
To compare loan offers from multiple
banks, you need to calculate the total amount of interest you would pay for
each offer. Knowing the annualized rate quoted by each bank will help you
calculate the interest rate you pay at different rest periods and enable you to
compare offers even if their interest rates are quoted differently. Search
BankBazaar.com to get the best interest rates available in the market
currently.
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