{"id":54654,"date":"2026-08-13T22:06:00","date_gmt":"2026-08-13T16:36:00","guid":{"rendered":"https:\/\/www.tatacapital.com\/blog\/?p=54654"},"modified":"2026-08-13T22:06:11","modified_gmt":"2026-08-13T16:36:11","slug":"types-of-interest-rates","status":"publish","type":"post","link":"https:\/\/www.tatacapital.com\/blog\/generic\/types-of-interest-rates\/","title":{"rendered":"Understanding different types of interest rates and how they are calculated"},"content":{"rendered":"\n

<\/p>\n\n\n\n

Interest rates differ based on how they are set and how interest is calculated. Common types include fixed, floating, hybrid, repo-linked<\/a>, MCLR-linked, simple, compound, flat, and reducing balance rates. Understanding how each works can help borrowers compare EMIs, total borrowing costs, and repayment structures. Factors such as benchmarks, calculation methods, compounding, and APR can significantly affect the actual cost of a loan.<\/p>\n\n\n\n

The main types of interest rate differ in two ways: how the rate is set and how interest is calculated. A rate may be fixed, floating, or linked to a benchmark such as the repo rate. Separately, interest may use the simple, compound, flat, or reducing balance method. Both choices affect the EMI and total borrowing cost. This guide explains the different types of interest rates in India and helps you compare their costs clearly before selecting a borrowing product.<\/p>\n\n\n\n

The types of interest rates on loans show how a rate is set and how interest is calculated.<\/p>\n\n\n\n

Types of interest rates at a glance<\/strong><\/h2>\n\n\n\n

So, how many types of interest rates are there? The table below covers nine common categories.<\/p>\n\n\n\n

<\/p>\n\n\n\n

Basis<\/strong><\/td>Type<\/strong><\/td>Meaning<\/strong><\/td><\/tr>
Rate setting<\/td>Fixed<\/td>Remains constant<\/td><\/tr>
Floating<\/td>Follows a benchmark<\/td><\/tr>
Hybrid\/dual<\/td>Fixed, then floating<\/td><\/tr>
Repo-linked\/External Benchmark Lending Rate (EBLR)<\/a><\/td>Follows approved external benchmark (usually repo rate)<\/td><\/tr>
Marginal Cost of Funds-Based Lending Rate (MCLR)<\/td>Follows bank’s internal benchmark<\/td><\/tr>
Calculation<\/td>Simple<\/td>Calculated on principal only<\/td><\/tr>
Compound<\/td>Calculated on principal plus accrued interest<\/td><\/tr>
Flat<\/td>Calculated based on the original principal<\/td><\/tr>
Reducing balance<\/td>Calculated based on the outstanding principal<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Fixed vs floating interest rate<\/strong><\/h2>\n\n\n\n

Fixed rates offer predictable EMIs, but may start higher and include prepayment charges. On the other hand, floating rates track a benchmark which affects the EMI or tenure.<\/p>\n\n\n\n

RBI directions<\/a> bar prepayment charges for floating, non-business individual loans sanctioned or renewed from January 1, 2026. Fixed-rate charges depend on the contract. For borrowers who want a middle path, a hybrid interest rate starts fixed, then floats.<\/p>\n\n\n\n

Choosing between fixed, floating, and hybrid interest rates depends on how much uncertainty in EMIs and tenure you are comfortable with. Different types of interest rates suit individuals with various levels of risk tolerance, so it\u2019s always wise to compare the types of interest rates on loans and check the relevant benchmark before making a decision.<\/p>\n\n\n\n

Repo-linked and EBLR rates: How floating rates work in India<\/strong><\/p>\n\n\n\n

Since October 2019, <\/a>RBI has required banks<\/a> to link new floating-rate retail loans to an external benchmark under the EBLR framework. The different types of interest rates in India under EBLR can track various benchmarks like the repo rate (repo-linked rate), specified Treasury bill yields, or another approved benchmark.<\/p>\n\n\n\n

The total interest rate on a floating loan equals the benchmark plus the lender’s spread, and resets at least every three months. For instance, the present repo rate is 5.25% as of August 5, 2026<\/a>. If the RBI changes the repo rate later, the revised rate must be reflected in eligible EBLR-linked loans within the three-month reset cycle.<\/p>\n\n\n\n

EBLR transmits policy changes faster than MCLR, which is an internal lending benchmark based on a bank\u2019s marginal cost of funds, and only applies to some older loans. The types of interest rate risks for an MCLR-linked loan<\/a> include a higher EMI or longer tenure when the benchmark rises.<\/p>\n\n\n\n

Simple vs compound interest<\/strong><\/h2>\n\n\n\n

While simple interest uses principal only, compound interest also uses accumulated interest.<\/p>\n\n\n\n

Here\u2019s an example of how these two different types of interest rates work: At 10% over two years, \u20b91 lakh incurs \u20b920,000 simple interest or \u20b921,000 with annual compounding.<\/p>\n\n\n\n

Simple interest usually appears in some short-tenure products, while compounding is more common in investments and long loans.<\/p>\n\n\n\n

Flat vs reducing balance interest<\/strong><\/h2>\n\n\n\n

With a flat rate, interest is calculated on the full loan amount throughout the tenure, even as you repay it. On the other hand, with a reducing rate<\/a>, interest is calculated only on the amount you still owe.<\/p>\n\n\n\n

Therefore, when comparing types of interest rates on loans, it\u2019s so important to check the total repayment amount, as two loans quoting the same interest rate can have different costs depending on whether they use the flat or reducing balance method.<\/p>\n\n\n\n

Nominal vs effective interest rate (and APR)<\/strong><\/h2>\n\n\n\n

The nominal interest rate is the stated rate, without accounting for compounding or fees, excluding compounding and fees. On the other hand, the effective rate includes compounding. What this means is that if a 12% nominal rate is compounded monthly, after interest is added every month, the effective annual rate increases to approximately 12.68%.<\/p>\n\n\n\n

The Annual Percentage Rate (APR)<\/a> combines loan interest and associated charges. RBI requires its computation in the Key Facts Statement before a retail term-loan contract is executed. When comparing types of loans and interest rates, use APR because a low flat rate may conceal a high effective cost.<\/p>\n\n\n\n

Which type of loan has the highest interest rate?<\/strong><\/h2>\n\n\n\n

Secured home, gold, and auto loans cost less because the collateral reduces risk. Unsecured personal loans<\/a> cost more, while revolving credit-card debt and informal or dealer flat-rate finance are often the most expensive.<\/p>\n\n\n\n

However, always remember that your interest rate is also highly dependent on your borrowing profile and chosen lender.<\/p>\n\n\n\n

Conclusion<\/strong><\/h2>\n\n\n\n

Understanding the various types of interest rates requires checking rate setting and calculation. When you understand the various terms related to loans and know how to compare them based on APR, you become empowered to choose the right credit option for your needs. For a smooth loan application process, explore a Tata Capital Personal Loan<\/a>.<\/p>\n\n\n\n

Do note that the rates, benchmarks, and terms may change at the RBI’s or lender’s discretion. All this is general information only, and it is essential to always compare the different types of interest rates available in India before choosing.<\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

Interest rates differ based on how they are set and how interest is calculated. Common types include fixed, floating, hybrid, repo-linked, MCLR-linked, simple, compound, flat, and reducing balance rates. Understanding how each works can help borrowers compare EMIs, total borrowing costs, and repayment structures. Factors such as benchmarks, calculation methods, compounding, and APR can significantly […]<\/p>\n","protected":false},"author":1,"featured_media":54655,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[74],"tags":[],"yoast_head":"\nTypes of interest rates explained: Fixed, floating & more<\/title>\n<meta name=\"description\" content=\"From fixed vs floating to simple vs compound and repo-linked rates - understand the main types of interest rates in India and how each one is calculated.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Types of interest rates explained: Fixed, floating & more\" \/>\n<meta property=\"og:description\" content=\"From fixed vs floating to simple vs compound and repo-linked rates - 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