Which banks use the daily rest method?
How a bank calculates interest on the amount you owe them matters much in the long run. Find out which banks use the better daily reducing balance method and which ones don’t.
Home loans last so long that even minor differences can have a substantial impact. A shift in the interest rate by even 0.25% shouldn’t be ignored. Over 15 years on a Rs40 lakh loan, for example, the difference in repayment between an interest rate of 10.5% and 10.75% would be Rs2.24 lakh. But you already know to look for a low interest rate, right? Here’s something you may not know, though. Lending companies don’t calculate the EMI using the same method. So, two banks offering the same interest rate may not offer you the same EMI, even though the tenure and loan amount are also the same.
What’s the difference?
There are three methods, but most banks use only two of them nowadays, for home loans at least. These are annually, monthly or daily rest (or reducing balance) methods. In the annual method, though the EMI is paid monthly, the adjustment towards interest and principal is made only at the end of the year. The concept remains the same for monthly and daily reducing balance. With the two methods, the adjustment is made on a monthly and daily basis, respectively. The shorter the length of time the adjustment is made in, the cheaper it is. Therefore, the daily rest method is always cheapest.
Here’s what the difference will be on a Rs20-lakh loan with a tenure of 10 years and interest rate of 10%:
|Method||Tenure||Amount||Interest rate||EMI||Total savings|
Result: With just a change in the method, we were able to save Rs1.34 lakh over the 15-year term, around Rs51,000 more than we were able to with the monthly reducing balance method.
Here’s a list of banks and the methods they use to calculate the EMI:
|Bank of Baroda||Daily|
|DLF Housing Finance||Monthly|
|LIC Housing Finance||Monthly|
|Punjab National Bank||Monthly|
|State Bank of India||Daily|
|Union Bank of India||Daily|