When you take out a personal loan, you have to return the principal amount plus an interest charge assessed by the loan issuer. Throughout the course of your loan, this sum will be paid in installments.
The total amount of interest that must be paid throughout the course of the loan is a crucial consideration because it has the potential to raise the total amount significantly. Therefore it’s important for you to know how to calculate the interest rate on your loan. This blog will educate you on the same!
What is interest on a Personal Loan?
Principal and interest are paid back on loans in equal amounts. The loan provider will charge interest as a separate component as part of the loan. It is paid regularly as a percentage of the outstanding loan balance.
When taking out a personal loan, it’s crucial to figure out how much interest you’ll be paying each month on your own. This can show you how much interest you’ve paid overall for the loan term.
Factors that affect the rate of interest on Personal Loans
The central bank typically sets the interest rate. However, the ongoing interest rates for various products are also influenced by market conditions. In addition to this, there are numerous more factors that can affect the interest rate you receive for personal loans. These considerations include your age, your income stability, whether you are salaried or self-employed, your job history overall and within the present company, the length of the loan, your credit score, your ability to repay the loan, and other things.
The following technical aspects of the loan also affect the interest rate you are offered:
Principal Amount: You can negotiate better with the lender if you need a bigger amount and have a good credit score.
Loan Term: The tenure of the loan will ultimately define how much interest you end up paying over the years.
Repayment Schedule: More frequent repayment would mean constantly decreasing the interest burden.
How to calculate interest on a loan?
The interest on your personal loan or any other loan is calculated in the following manner:
EMI = [P x (R/100) x {1+(R/100)} ^N]/[{1+(R/100)}^(N-1)]
Here,
EMI = equated monthly instalments
P = the principal amount borrowed
R = loan interest rate (monthly basis) = annual interest rate/12
N = loan tenure (in months)
Let us assume that Shyam, a borrower borrows a sum of Rs. 5 lakhs at a rate of 12% for a tenure of 5 years. The interest for the 1st month will be calculated as follows:
(5, 00,000*0.12/12)=5,000
The total EMI payable is the sum of the interest and principal amount.
How can an EMI on a loan change during the entire tenure?
Despite the fact that your personal loan EMI is typically a constant amount, there are a few situations when it may change:
In case of loan prepayment: If you choose to prepay your personal loan, you have two options: you may either cut your EMIs for the same tenure, or you can shorten the period for the same EMIs. Therefore, if your present EMI amount is straining your funds, you might choose to lower your EMI payments. Otherwise, shortening the loan’s term is better because it will lower the total interest cost of the loan.
In case of rate change in the floating interest rate: Some financial institutions provide personal loans with floating interest rates that are based on their external benchmark rates. The applicable rate of interest changes when these benchmark rates do. If the borrower agrees, the lender may extend the loan term while maintaining the same EMIs in the event that the floating interest rate rises. The lender may raise your EMI if the new tenure exceeds the maximum time frame allowed.
Key Takeaways
Knowing how to calculate the total interest for a personal loan, it would be wise to have your calculations on hand while shortlisting the best offers given to you. You can also use additional online loan interest calculators, personal loan calculators, and EMI calculators. Personal loans are just a few clicks away in our digital age. With ReferLoan, you can easily apply for personal without any hassle, and the money will be deposited into your account within a few hours. So, avail of the facility of a Personal loan right away with us!
FAQs
Lenders typically use the reducing balance approach to determine the EMI for a personal loan.
You should get in touch with your lender if you wish to adjust the date of your personal loan EMI. The procedure for starting this change may differ from one lender to another.
An amortization schedule is a table that shows how much interest and principal will be included in each of your monthly payments over the course of the loan
You can send Standard Instructions (SI), NACH mandates, or post-dated checks to your bank to make payments on your personal loan EMIs. Some lenders also provide you the choice of direct deduction of the EMI from your employer.