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Business News/ Money / De-Jargoned | Rest
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De-Jargoned | Rest

De-Jargoned | Rest

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What is it?

The dictionary defines rest as cessation of work, sleep or relaxation. But in banking, the term “rest" is used in the context of a reducing balance loan. The term defines the periodicity at which the principal amount is reduced as the borrower repays. Rests are usually monthly, quarterly and annual.

Monthly rest

A monthly rest recalculates the reduced principal after each equated monthly instalment (EMI), and then applies the interest rate on the reduced principal. For instance, on a loan of Rs1 lakh at an interest of 7.50% per annum on a monthly rest for 20 years, the first month’s EMI is Rs805.59, of which Rs80.50 is the principal repayment. At the end of the first month, your principal is reduced by Rs80.50 and the interest is reworked on Rs99,819.41.

Quarterly and annual rest

Quarterly rest applies when the repayments are made every quarter. Here, you get the benefit of a lower principal only after three months. The repaid principal adjusted after a year is called annual rest. Here, the wait is even longer.

Which is better

The interest you pay is least in monthly rest, a little higher in quarterly and highest in annual. For instance, if you borrow Rs5 lakh at 12% for 20 years, the total interest you pay on monthly rest is Rs8.21 lakh. You pay Rs8.24 lakh on quarterly rest and Rs8.38 lakh on annual rest. So, while taking a loan, opting a type of rest becomes important.

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Published: 27 Apr 2010, 10:35 PM IST
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