Business Loan Comparison
The lowest quoted rate is frequently not the cheapest loan. Fees, bundled insurance, advance instalments and whether the rate is flat or reducing move the answer, sometimes by lakhs. This ranks your offers on what you will actually pay.
Choosing it over the most expensive offer here saves Rs.4,78,197 across the life of the loan.
Note that NBFC offer quotes the lowest headline rate at 9.5% and is not the cheapest offer. Fees, insurance, advance EMIs and the rate basis move the answer.
Quoted rate against what you actually pay
KarobarUdhar Insider Tip
A flat rate and a reducing rate are not comparable numbers, and putting them side by side is the most expensive mistake in business borrowing. Flat interest is charged on the original amount for the whole tenure regardless of how much you have repaid, so a 9.5% flat quote over five years works out close to 17% on a reducing basis. NBFCs quote flat far more often than banks do. If a quote sounds unusually good, ask which basis it is on before anything else.
KarobarUdhar Insider Tip
Advance EMIs are the least visible cost on this list. Collecting two EMIs upfront means you borrow the full amount, pay interest on the full amount, and never have the use of two months of it. On the default figures here that alone moves the effective rate by a noticeable margin. It rarely appears in the rate discussion and is usually mentioned for the first time at disbursal, so ask about it early and in writing.
Indicative only. The effective rate is solved by equating the amount actually disbursed to your account against the payment stream, then annualising the monthly rate. It is directly comparable with a quoted reducing balance rate. Guarantee fees are approximated on the sanctioned amount across the tenure rather than on a declining balance, so a CGTMSE-backed offer is treated slightly conservatively here. Use the CGTMSE fee calculator for a precise figure on that component.
Why the quoted rate tells you so little
Two things break the comparison between business loan offers, and both are easy to miss.
The first is the rate basis. Flat interest is charged on the original principal for the whole tenure, so you keep paying interest on money you have already repaid. Reducing balance interest is charged only on what remains. The same number means very different things depending on which is being quoted, and a flat quote roughly one and a half to two times lower than a reducing one is not the bargain it appears to be.
The second is the gap between what is sanctioned and what arrives. A processing fee, a bundled insurance premium and one or two advance instalments can easily take five percent off the disbursal, and you pay interest on all of it. The effective rate this tool solves for is the rate that equates the money that actually reached your account against the payments you actually make, which is the only figure that compares two offers fairly.
How to use it
- Enter each offer exactly as quoted. Do not convert anything yourself. Enter the rate as the lender stated it and select whether it is flat or reducing.
- Include every deduction. Processing fee, insurance premium and advance EMIs all reduce what reaches your account. If you do not know them, ask before signing.
- Add the guarantee fee if the offer is scheme-backed. A CGTMSE-covered loan carries an annual guarantee fee on top of the interest rate, and leaving it out understates the cost.
- Read the effective rate, not the quoted one. The ranking is on true cost. Where the lowest headline rate is not the cheapest offer, the tool says so explicitly.
Common questions
What is the difference between a flat rate and a reducing rate?
A reducing balance rate charges interest only on what you still owe, so the interest component falls every month. A flat rate charges interest on the original amount for the entire tenure regardless of how much you have repaid. A 9.5 percent flat quote over five years works out close to 17 percent on a reducing basis. NBFCs quote flat far more often than banks, which makes headline comparison between the two meaningless.
Why is the effective rate higher than the rate I was quoted?
Because the quoted rate is applied to the sanctioned amount while you receive less than that. Processing fees, bundled insurance and advance EMIs are deducted before disbursal, so you are paying interest on money that never reached your account. The effective rate here is solved by equating what actually arrived against what you actually pay.
What are advance EMIs and why do they matter?
Some lenders collect one or more instalments upfront, deducted from the disbursal. You borrow the full amount, pay interest on the full amount, and never have the use of that money. It is the least visible cost in a loan offer and is often mentioned for the first time at disbursal. Ask about it early and get the answer in writing.
Should I always take the offer with the lowest effective rate?
Usually, but not always. Disbursal speed, prepayment terms, whether collateral is required, and the working relationship all carry real value. A slightly costlier facility that funds in a week can be worth more than a cheaper one that takes six. The point of the comparison is to know what that convenience is costing you rather than to be unaware of it.
How should I compare a CGTMSE-backed offer against a secured one?
Enter the guarantee fee in the field provided so it is included in the cost. Note that this calculator approximates the guarantee fee on the sanctioned amount across the tenure rather than on a declining balance, which treats a CGTMSE offer slightly conservatively. Use the CGTMSE fee calculator for a precise figure on that component.