What is rest?

By | April 6, 2012

To understand how a home loan works one needs to understand what a rest means. A rest is the interval at which the remainder of the loan amount is recalculated as you repay the loan. This is relevant only in the case of a reducing balance loan as opposed to a flat rate interest loan. These regular intervals or Rests can be yearly, monthly or even daily.

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.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

4 thoughts on “What is rest?

  1. Udayabhanu

    Though the monthly rest is beneficial to the consumer why thisis not implemented across the country? Why the banks wnat to earn throughthe ignorance ofthe people?

    Can naything can be done by you in this regard and any support people like us can extend?

    Reply
  2. Udayabhanu

    Though the monthly rest is beneficial to the consumer why this is not implemented across the country? Why the banks want to earn throughthe ignorance ofthe people?

    Can naything can be done by you in this regard and any support people like us can extend?

    Reply
  3. JaneRadriges

    The best information i have found exactly here. Keep going Thank you

    Reply

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