Most individuals base their borrowing decision on the loan interest rate. However, merely knowing the rate does not provide an insight into monthly loan liability or help understand one’s repayment capacity.
To understand the same, intending borrowers need to find out about the total payable interest on a loan. Having an idea of interest on loan throughout the repayment tenor allows managing finances better and planning repayment accordingly.
Computing loan interest manually is not a simple task, but individuals can easily find out their liability with the help of an online interest calculator. Regardless, it is vital to understand how interest on a loan is calculated and the steps involved, to streamline the process.
How is personal loan interest calculated?
Generally, interest on a loan is calculated by using this formula –
EMI = [P x (R/100) x {1+(R/100)}^N]/[{1+(R/100)}^(N-1)]
Note that here,
P is the principal loan amount
R is the interest rate
N is loan tenor expressed in months
The complex formula involves multi-step calculation. The manual process to compute interest is otherwise lengthy and prone to errors. This is why using a loan interest calculator is a more accurate and convenient alternative.
Steps to calculate interest on personal loan interest calculator
An individual can compute the interest he/she will have to pay on a personal loan using an interest calculator. He/she needs to follow these simple steps to obtain accurate results:
Step 1: Visit the personal loan EMI calculator page.
Step 2: Enter the loan amount and repayment tenor.
Step 3: Enter the prevailing interest rate.
Once the individual feeds these data into the personal loan calculator, he/she will find out the payable interest amount. Besides these, the calculator will also display loan EMI and total loan liability.
It also offers insights into the EMI repayment schedule. Such a table will help understand the principal and payable interest breakup of the entire loan tenor. Based on the details received, intending borrowers can make financial plans more comprehensively.
It must be noted that the resulting interest amount depends on several factors. Therefore, having an idea about those factors can help intending borrowers in more than one way.
Example of loan interest calculation
Suppose an individual decides to apply for an instant personal loan of Rs.5 lakh for 3 years. The lender levies a 12% interest rate on the loan amount. To understand interest and loan liability, the borrower can use a personal loan EMI calculator and arrive at following information –
The total interest on the loan will be Rs.97,860, and EMI will be Rs.16,607. Also, the total loan liability for 3 years will amount to Rs.5,97,860.
Factors influencing instant personal loan interest rates
These are among the major factors affecting personal loan interest rate for a particular applicant –
- Loan amount: Sanctioning a higher loan amount carries a greater risk for lenders. This is why they often tend to levy a higher interest rate on big-ticket loans. However, having a decent credit profile can work in favour of applicants.
- CIBIL score: A high CIBIL score for a personal loan reflects creditworthiness. Lending institutions prefer applicants who have a higher CIBIL score over others when it comes to loan approval. Typically, those with a credit score of 750+ are more likely to get a high loan amount sanctioned at a lower interest rate than those with a lower score.
- Repayment record: Individuals with a track of delayed payment or default are risky for lenders. They consider applicants with a poor track record more likely to default than those with a spotless history. Accordingly, lenders levy a high interest rate on the loan amount they sanction for those applicants.
- Repayment tenor: Often, a longer repayment tenor attracts a higher interest rate. Similarly, the overall interest payout on loans with longer tenor is relatively higher as interest is computed on the outstanding amount.
Besides these, individuals with strong financial standing, a regular flow of income and a stable job are considered more creditworthy. Accordingly, they are likely to receive loan amounts at low-interest rates and better terms of payment.
Intending borrowers can further lower their interest outflow on a personal loan by selecting financial institutions like Bajaj Finserv, which offer loans at competitive rates.
They also provide pre-approved offers to customers to make the borrowing experience more worthwhile. Usually, these offers are available on multiple financial products, including personal loans and business loans. Check your pre-approved offer online by entering your name and contact number.
Besides determining loan interest amount, an online interest calculator helps gauge the repayment capability. It also helps compare quick loans and consequently choose the best option as per the requirement and financial standing of the borrower.
