Mahesh Palkar, a resident of Nerul in New Mumbai, was in dire need of about Rs 100,000. Taking a personal loan was the only option left for him. But he wanted the money at a very low interest cost.

Loan offers were flowing against the credit cards he held, but the interest rate was very high in the range of 16 to 18 per cent.

In the midst of checking with various banks, the Reliance [Get Quote] Infocomm employee received a call from a Citibank direct sales agent. The offer was for a loan at a flat rate of 6 per cent.

He grabbed it, rushed to complete all the formalities in a couple of days and received a cheque for Rs 100,000 the next week.

The flat rate of interest worked out cheaper. Mahesh kept the interest cost to about two-thirds of the normal cost. The interest on the Rs 100,000 loan for one year was Rs 6,000 with the equated monthly instalment at Rs 8,834.

If Mahesh had opted for a repayment period of 2 years, he would have paid interest for 2 years on the entire Rs 100,000 principal amount.

The interest cost on a 6 per cent flat rate works out to around 11.52 per cent -- the flat rate plus 5.52 per cent. That's because the interest is payable on the entire loan amount throughout the repayment term. The principal amount is never reset for calculation of interest in a flat rate loan.

If the repayment term is 2 years or more, the interest cost turns out to be the flat rate plus about 5 per cent.

It's easy for a loan seeker to lose sight of the interest cost when he is desperately in need of funds. One has to carefully check with what the offer is. Before taking up the Citibank loan offer, Mahesh had accepted an offer against his ICICI Bank [Get Quote] credit card for a loan at 11 per cent.

He was blinded by the urgency for funds. A phone banking executive from ICICI Bank had said the interest rate would be 11 per cent. She had held back the information that the interest she was quoting was a flat rate for the entire tenor of the loan.

Mahesh realised what the actual interest rate was only when he received a cheque from ICICI Bank. The covering letter had no mention of the figure 11 per cent. The interest rate stated was a little over 17 per cent.

He did not avail of this loan and instead preferred the Citibank offer having by then comprehended the impact of a loan at a flat rate.