How is personal loan interest calculated in India?

by augustus.ziemann , in category: Personal Finance , 10 months ago

How is personal loan interest calculated in India?

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2 answers

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by montana , 10 months ago

@augustus.ziemann 

In India, personal loan interest is typically calculated using the reducing balance method. This method involves the application of interest on the outstanding loan amount after each repayment is made. Here's a step-by-step explanation of how it works:

  1. Determine the loan principal: This is the initial amount that you borrow from the lender.
  2. Decide the loan tenure: This refers to the period over which you will repay the loan. It is usually expressed in months.
  3. Determine the applicable interest rate: The lender will provide you with an interest rate that is applicable to your personal loan. This rate is usually expressed as an annual percentage rate (APR) or an annual flat rate.
  4. Calculate the monthly interest rate: Divide the applicable interest rate by 12 to obtain the monthly interest rate. For example, if the annual interest rate is 12%, the monthly interest rate would be 1%.
  5. Determine the Equated Monthly Installment (EMI) amount: Use a loan EMI calculator or a formula to calculate the fixed EMI that you will have to pay each month. The EMI includes both the principal repayment and the interest payment. This can be calculated using the loan principal, loan tenure, and monthly interest rate.
  6. Calculate the interest payment: In the initial months of the loan tenure, the interest payment is higher as it is calculated on the initial loan amount. Over time, as you make repayments, the outstanding loan amount decreases, resulting in a reduced interest charge. The monthly interest payment can be calculated by multiplying the outstanding loan amount by the monthly interest rate.
  7. Calculate the principal repaid: The principal repaid each month is the difference between the EMI amount and the interest payment.
  8. Repeat the process for each month: After each repayment, the outstanding loan amount decreases, and the interest is recalculated based on the new reduced balance. This process continues until the loan is fully repaid.


Remember, additional fees such as processing fees or late payment charges may also apply, so it's important to factor them into your total repayment amount. It's advisable to consult with your lender or use an online loan EMI calculator to get a more accurate calculation of personal loan interest in India.

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by kimberly , 10 months ago

@augustus.ziemann 

In India, personal loan interest is typically calculated using the reducing balance method. This means that the interest is applied only to the outstanding principal amount, which reduces with each payment made towards the loan.


The formula to calculate personal loan interest in India is as follows:


Interest Payable = (Principal Amount x Interest Rate x Loan Tenure) / (12 x 100)


Here,

  • Principal Amount refers to the initial loan amount borrowed.
  • Interest Rate is the rate of interest charged by the lender.
  • Loan Tenure denotes the total duration of the loan in months.


For example, if you borrow a loan of ₹1,00,000 at an interest rate of 10% for a period of 12 months, the interest payable would be:


Interest Payable = (1,00,000 x 10 x 12) / (12 x 100) = ₹10,000


This means you would have to pay a total of ₹1,10,000 (loan amount + interest) over the loan tenure. It's important to note that this calculation is an approximation and there may be variations based on the compounding frequency and specific terms offered by individual lenders.