The price of taking out a personal loan from a lender is the interest rate. It serves as a fee for the right to operate funds held by the bank. Over the life of the loan, the remaining loan balance is used to calculate this interest.
This can be explained as follows:
- In percentage terms: Annual Percentage Rate (APR) is a common way of representing the interest rate on a personal loan. The APR includes the basic interest rate and all other costs.
- It varies depending on the subsequent elements: Depending on your creditworthiness, the size and duration of the loan and the lender’s restrictions, your interest rate may change. Generally, interest rates are lower for borrowers with better credit scores and shorter loan terms.
How loan interest works
Interest on personal loans is often amortized. This means that you are charged interest every month on the unpaid loan balance. As a result, when the principal amount is reduced later in the loan term, you pay less interest and more interest at the beginning of the loan term.
Borrowers can visualize personal loan interest in two ways:
- Basic interest (Estimate): This uncomplicated approach is based on the assumption that interest is charged only on the initial loan balance. It can be used as a general estimate, although it is not very exact.
Although this method is easier to calculate, it only takes into account the original loan amount and ignores debt that decreases over time. Here is the equation:
Interest = principal x rate x time
Where
Main: The amount of money borrowed
Indicator: The annual interest rate of the loan
Time: Loan period
- Amortized interest (More precise): This approach allows you to give a more realistic estimate of the total amount of interest you will pay, taking into account your decreasing loan balance. Using an online loan calculator or financial calculator is an ideal way to implement this strategy.
Utilize a finance calculator or an online loan calculator as it is more hard to calculate on your own. Personal Loan EMI Calculator is a useful online tool that helps you estimate your Equated Monthly Installment (EMI) repayment for a personal loan. It takes into account three key factors:
Amount of credit: The total amount of money borrowed from the lender.
Interest: The APR imposed by the lender, which includes both the base interest rate and any additional costs.
Loan period: The total number of months or years you borrow money for.
Once you enter these facts into the calculator, it will perform advanced math to calculate your EMI. This method takes into account amortized interest, which means it takes into account the loan balance decreasing over time.
READ ALSO: 7 Key Steps to Take to Get a Personal Loan After Bankruptcy
The amortization schedule in the illustration below explains how the amortized interest on the personal loan you are seeking is paid. Suppose you have availed a personal loan of ₹1,00,000 for 12 months at an interest rate of 10.5%.
Period |
EMI |
Interest |
Main |
Oscillate |
0 |
|
|
|
₹100000.00 |
1 |
₹8814.86 |
₹875.00 |
₹7939.86 |
₹92060.14 |
2 |
₹8814.86 |
₹805.53 |
₹8009.33 |
₹84050.81 |
3 |
₹8814.86 |
₹735.44 |
₹8079.42 |
₹75971.39 |
4 |
₹8814.86 |
₹664.75 |
₹8150.11 |
₹67821.28 |
5 |
₹8814.86 |
₹593.44 |
₹8221.42 |
₹59599.86 |
6 |
₹8814.86 |
₹521.50 |
₹8293.36 |
₹51306.49 |
7 |
₹8814.86 |
₹448.93 |
₹8365.93 |
₹42940.57 |
8 |
₹8814.86 |
₹375.73 |
₹8439.13 |
₹34501.43 |
9 |
₹8814.86 |
₹301.89 |
₹8512.97 |
₹25988.46 |
10 |
₹8814.86 |
₹227.40 |
₹8587.46 |
₹17401.00 |
11 |
₹8814.86 |
₹152.26 |
₹8662.60 |
₹8738.40 |
12 |
₹8814.86 |
₹76.46 |
₹8738.40 |
₹.00 |
Source: HDFC Bank website (as of June 6, 2024) |
Frequently asked questions (Frequently asked questions)
Q. How can you repay personal loan EMIs?
There are some uncomplicated ways to pay personal loan EMIs in India:
- National Automatic Clearing House (AFTER) or Electronic Billing Service (ECS): This popular choice involves telling the bank to automatically deduct the EMI amount from your linked savings account on the due date. This reduces the possibility of missed payments and delayed payment penalties while ensuring timely payments. By using the online banking interface or by completing an authorization form at your local bank branch, you can set up ECS/NACH.
- Standing instructions (AND): Standing instructions allow you to schedule automatic transfers from your savings account to your loan account at the required date. They work similarly to ECS/NACH. This service is usually provided by your bank and you can visit a branch or operate online banking to activate it.
- Internet banking: Using online banking platforms, many banks allow their customers to repay their loans immediately. On or before your loan is due, you can transfer money from your savings account to your loan account.
- Mobile banking applications: You can conveniently repay your loan EMI using the banks’ mobile banking app. To pay using your debit card or account balance, select your credit account after logging in to the mobile banking app.
- Payment by debit card: Direct EMI payments via debit card are accepted by some lenders. You can operate the lender’s mobile application or online portal for this purpose. Check whether there is enough funds in your debit card account to cover the EMI amount.
- Payment by check: Although it is less popular nowadays, you can still pay your EMI by check, in person at the lender’s branch or by post to the address provided. To avoid delayed payment penalties, start paying by check well before the due date as this option is slower and may cause processing delays.
- Payment in cash: In uncommon cases, some lenders may accept cash EMI payments at their branches. However, for security reasons and the lack of proof of payment, this option is not recommended.
Q. How to choose the right loan EMI repayment method?
Choosing the right personal loan EMI repayment method depends on various factors, and the optimal choice may involve a combination of methods that suit your situation. Below is a summary of the most critical issues:
- Considering the convenience: Choose the method that best suits your interests and lifestyle. Since they can be accessed at any time and from anywhere, online and mobile banking options are the most practical.
- Priority on timeliness: If you have trouble remembering deadlines, automated payment systems such as ECS/NACH or standing orders will support you make payments on time and avoid delayed penalties.
- Pay attention to safety: When making online payments, operate a reliable device and a secure internet connection to reduce the risk of fraud.
It is best to ask your lender about their recommended EMI payment options. Payment methods should be clearly stated on their website or mobile app.
READ ALSO: Are you considering a second personal loan? Here are the challenges and alternative solutions
Q. What are the ways to reduce personal loan EMIs?
Lowering your personal loan EMI can improve your cash flow and potentially accelerate your path to debt freedom. Here are some approaches you may consider:
- Only borrow what you need: It may seem uncomplicated, but EMIs and overall interest costs reduce when you borrow only what is necessary.
- Request a loan transfer: Transferring your existing loan to a novel lender with a lower interest rate is included in the balance transfer process. You can reduce your EMI significantly if you qualify for a better deal. However, you should pay attention to any associated administrative costs and ensure that the transfer generates a profit.
- Maintain a high credit score: A high credit score allows you to get a better interest rate on a balance transfer or negotiate a lower interest rate with your current lender.
- Extended internship: Lower EMIs are the result of choosing a longer loan period. However, over the life of the loan, this strategy requires you to pay higher interest. Only consider this if your current EMI is putting a significant strain on your finances.
- Lump sum payment: One option to pay off your loan quickly is to make a lump sum payment if you have excess funds. This lowers the amount that is still owed, which depending on the lender’s policy, can lead to lower future EMIs and reduced interest expenses.
- Partial payments: Over time, even modest and consistent prepayments can have a substantial impact. Find out about partial prepayment terms from your lender, including any associated costs.
Q. Can you operate an online loan calculator to calculate the interest amount on any type of loan?
The personal loan amortization EMI of any bank or financial institution can be calculated using a calculator. You don’t have to take out a personal loan from any particular bank or lending organization, and the service is free.
Posted: Jun 7, 2024 5:46 pm EST