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How to Avoid Home Loan Flat Interest Rate Trap?

July 24, 2020 Leave a Comment

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Buying a house is easier now – thanks to quick and easy home loans that are available at attractive interest rates. However, not all home loan interest rates are designed in the borrower’s interest. The finance market is flooded with schemes that leave you with a significant debt liability than your initial borrowings.

Of such schemes, many lenders use home loan flat interest rates as a marketing gimmick to lure borrowers into taking out a home loan online. They often mislead the borrowers by quoting lower interest rates, thereby leading them into a debt trap.

On such occasions, how can you avoid falling into a debt trap? Read on to find out.

What Is a Flat Interest Rate?

A flat interest rate is calculated on the original principal loan amount until the loan tenure ends. Thus, the interest and the principal portion on the EMI amount remains the same throughout the loan tenure.

A flat interest rate works like this: unlike a conventional interest rate, the interest portion on your EMI amount does not reduce over the tenure. As a result, your EMI amount is not affected by changes in the outstanding principal amount as the interest charged remains the same.

Consequently, the total interest outgo on a home loan with a flat interest rate is more than a home loan with a conventional interest rate. As a result, the overall cost of your residential property increases.

Apart from the property cost, there are other disadvantages of taking a home loan at a flat interest rate. The effective flat interest rate is 1.7 to 1.9 times more than a reducing home loan interest rate –so the cost of borrowing is significantly higher at a flat interest rate.

Moreover, borrowers are liable to pay the same EMI amount throughout the loan tenure. They cannot access the benefits of lowered lending rates and end up with bad debt.

How to Avoid a Flat Interest Rate Trap?

For a salaried individual, debt is unavoidable. However, borrowing a home loan without understanding the nature of the loan scheme can land you in bad debt – especially in the case of a home loan flat interest rate that is non-transparent and misleading.

Nonetheless, you can avoid a bad debt by following these tips –

  • Typically, the EMI outgo should not be more than 50% of your income. To ensure this, use a home loan EMI calculator to estimate the EMI amount for your loan tenure.
  • Before signing the dotted line on your home loan agreement, always review and debate vague clauses with your lender to avoid future disputes.
  • Remember to ask the lender about the method they use to calculate the interest rate. If they use a flat interest rate method, then go for another lender.

The Bottom Line

A bad debt impacts your credit score poorly, which in effect harms your borrowing prospects. Therefore, before you apply for a home loan online, review the market lending rates, and compare loan offers accordingly.

The trick is to find the right lender to avoid falling into a debt trap.

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About the Blogger Hi I am SB, a personal finance enthusiast with a career in software development. I am an immigrant to the USA since 2005, after being born and brought up in India. This 40 something technocrat lives and breathes personal finance whenever he gets time from the day job, job as a husband and a dad

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