In India, personal loan is one of the most reliable options to create a fund for personal expenses. You can avail this popular option offered by various banks and financial institutions at a competitive rate of interest. Let us understand what is the interest on a personal loan and how is it calculated.
What is Interest Rate?
The interest rate on loan signifies the amount paid to the lender every year on the outstanding amount of the loan availed. It is denoted as Annual Percentage Rate.
What is Interest on Personal Loan?
When you borrow a loan, it comes with a precondition of repayment. And repayment of loan can be made in two parts:
- The principal
- The interest
Interest is paid periodically as a percentage of the remaining loan amount and is a separate component of a loan, which is levied as a charge by the loan provider.
Factors that Influence Interest Rate on Personal Loans
Various factors influence interest rate on personal loans. Although the central bank sets the interest rate, market conditions too, influence the interest rates for personal loans. Besides, age,income, employment status, work experience, credit score,loan tenure, existing loans or other borrowings and repayment capacity are also considered are other factors that influence the interest rate if you wish to apply for personal loans.
Other technical factors relating to the loan that impact the interest rate you are offered includes:
Principal Amount
You can negotiate better with the lender in case you need a more significant amount along with 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
Frequent repayment will lead to continually decreasing the burden of interest.
How is Interest on Personal Loan Calculated?
EMI Calculators online help you to do the calculations right with the formula
EMI calculation formula:
Interest = Principal Amount x Rate of Interest
For instance:
Rohan takes a personal loan of Rs.5 Lakhs at an interest rate of 12% per annum to be paid back in 5 years, the interest will be calculated as:
(5,00,000*0.12/12)=5,000
The total EMI (Interest + Principal) will beRs.11,122.
After applying the EMI calculation formula, first-month calculation looks something like this:
| Month | Loan Balance | EMI | Interest Paid | Principal Paid | New Balance |
| 1 | 5,00,000 | 11,122 | 5,000 | 6,122 | 4,93,878 |
For the next month, the interest will be calculated on the new balance, which is calculated as:
Loan Balance – Principal Paid
In this case, to determine the interest, you will have to use the new balance – Rs.4,93,878 as the loan amount.
From here, you can create your own loan calculator in Excel for the subsequent months, which would be something like:
| Month | Loan Balance | EMI | Interest Paid | Principal Paid | New Balance |
| 2 | 4,93,878 | 11,122 | 4,939 | 6,183 | 4,87,695 |
| 3 | 4,87,695 | 11,122 | 4,877 | 6,245 | 4,81,450 |
| 4 | 4,81,450 | 11,122 | 4,814 | 6,308 | 4,75,142 |
| 5 | 4,75,142 | 11,122 | 4,751 | 6,371 | 4,68,772 |
| 6 | 4,68,772 | 11,122 | 4,688 | 6,434 | 4,62,337 |
| 7 | 4,62,337 | 11,122 | 4,623 | 6,499 | 4,55,839 |
| 8 | 4,55,839 | 11,122 | 4,558 | 6,564 | 4,49,275 |
| 9 | 4,49,275 | 11,122 | 4,493 | 6,629 | 4,42,646 |
| 10 | 4,42,646 | 11,122 | 4,426 | 6,696 | 4,35,950 |
| 11 | 4,35,950 | 11,122 | 4,360 | 6,762 | 4,29,188 |
| 12 | 4,29,188 | 11,122 | 4,292 | 6,830 | 4,22,358 |
How is Total Interest on Personal Loans Calculated?
The total interest paid on your personal loan for the first year can be calculated by adding up the interest of all the 12 months.
Adding up the interest on all 12 months, you can determine the total interest paid on your personal loan for the first year, which in this case would be Rs.55,822.
Now to determine the total interest that Rohan would end up paying throughout 5 years can be determined by stretching the same inputted formulae in excel to 60 months. The result for the last year (5th year in this case) would be something like:
| Month | Loan Balance | EMI | Interest Paid | Principal Paid | New Balance |
| 49 | 1,25,182 | 11,122 | 1,252 | 9,870 | 1,15,311 |
| 50 | 1,15,311 | 11,122 | 1,153 | 9,969 | 1,05,342 |
| 51 | 1,05,342 | 11,122 | 1,053 | 10,069 | 95,273 |
| 52 | 95,273 | 11,122 | 953 | 10,169 | 85,104 |
| 53 | 85,104 | 11,122 | 851 | 10,271 | 74,833 |
| 54 | 74,833 | 11,122 | 748 | 10,374 | 64,459 |
| 55 | 64,459 | 11,122 | 645 | 10,478 | 53,981 |
| 56 | 53,981 | 11,122 | 540 | 10,582 | 43,399 |
| 57 | 43,399 | 11,122 | 434 | 10,688 | 32,711 |
| 58 | 32,711 | 11,122 | 327 | 10,795 | 21,915 |
| 59 | 21,915 | 11,122 | 219 | 10,903 | 11,012 |
| 60 | 11,012 | 11,122 | 110 | 11,012 | 0 |
By looking at the tables, you will understand that the dues on interest as well as principal are paid in the 60th month, putting closure to the loan.
Let’s have a look at the totals:
Total EMI = Rs.6,67,333
Total Principal Paid = Rs.5,00,000
Total Interest Paid = Rs.1,67,333
Hence, the total interest paid by Rohan on the borrowed amount comes to 33%.
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EMIs on personal loan can be calculated manually and using Excel. However, the simplest way is to take help of loan calculators available online by PaySense. This would help you calculate the amount you need to pay every month in order to fully repay the borrowed loan amount within the pre-decided term duration. With this online calculator, you can input the amount of loan you are looking for and then analyze the options available based on the monthly EMI amount that would be comfortable for you to pay. Using our app and web platforms, you can apply for lucrative personal loans online of up to Rs.2 Lakhs. In just three easy steps, your loan would be sanctioned and disbursed within a few hours right into your bank account. PaySense can be your best option for easy, instant, and hassle-free personal loans.
