How to Calculate Interest Rate on Personal Loans?

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A Personal Loan is one of the lending products offered by the banks and NBFCs. They are also called as small loans as the amount offered for a Personal Loan ranges from INR 50,000 to INR 25 lakhs. Personal Loans are unsecured loans as you don’t have to offer collateral to the lender to get your loan approved. Due to the lack of security interim your credit score plays an important role to get the loan approved, so you need to be cautious about your credit reports before applying for a Personal Loan.

People apply for a Personal Loan so that they can fund their education, wedding and medical expenses, and even cultural celebrations, but that does not mean that you apply for a Personal Loan blindly without inspecting the various facts with regards to the Personal Loan.

When you apply for a Personal Loan, there are many things that can make a huge difference when you repay your loan. The most important thing that you need to check is the Interest rate applied on your Personal Loan.  

It is important that you calculate the interest rate before you apply for the loan as it is an important part of loan planning. A calculated interest rate can give you an estimate of the amount that has to be paid over the years if you proceed to take a Personal Loan without calculating the interest rate, you might end up repaying more than you expected.

How to Calculate the Interest Rate for a Personal Loan?

There are two ways using which the interest rate for Personal Loans can be calculated:

  • Manual math: The interest rate for Personal Loans can be calculated with the help of a mathematical formula.

A Loan is a combination of three important things that include:

  • Principle: The principal amount is the sum of money that the applicant applies as a loan for financial aid from the banks. The principal amount of Personal Loans can range from INR 50,000 to INR 25 lakhs.
  • Interest rate: The interest rate is an important part of a loan and is charged on a yearly basis. The longer the tenor of the loan, the higher the interest amount that has to be paid for the loan.
  • Tenor: It is the duration that is decided by the applicant during which he/she has to repay the loan.

In order to calculate the monthly interest rate, you need to have all the three factors in facts and figures. The interest rate for a Personal Loan can be calculated based on the time frame of half yearly and monthly basis. The formulae for calculating Personal Loans is:

A=P(1+(rn))n*t

The above equation is an illustration of how the Personal Loan EMI is calculated:

In the above formula,

P= to the principal loan amount

r= the interest rate per month.

n= number of times interest rate is compounded per year

t= number of years

A= Total interest amount incurred

  • Using the interest rate calculator: It is not possible for many people to calculate the interest rate accurately using a mathematical formula. Hence, you can take the help of an online Personal Loan interest rate calculator. A Personal Loan interest rate calculator is computerised software that provides you with the estimated Personal Loan interest rate using digital sliders and search bars. These sliders are programmed with the range of principal amount, EMIs and tenor of the loan that can be adjusted to the desired amount to get the estimated interest rate that will be charged for the Personal Loan.

A Personal Loan can be beneficial for providing backup funds during the time of financial emergency, but it is essential that you consider the interest rates offered by the lender. To get lower interest rates on Personal Loans, you can consider taking a loan from the NBFCs.

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