Understanding the rate calculation method can help you gain clarity on how your interest is calculated, this way you can plan your finances accordingly. Here are two common rate calculation approaches:
1. Flat Interest Rate: Under this method, the interest is calculated on the entire loan amount throughout the loan tenure. The interest remains the same throughout the repayment period, regardless of the outstanding principal. While this method may seem straightforward, it often results in higher interest costs over time.
2. Reducing Balance Method: This is the most commonly used method for home loan interest calculations. The interest is calculated based on the outstanding principal balance. As you make your monthly payments, the principal amount decreases, resulting in a lower interest charge. This method can help you save on interest costs over the long term.