Applying for a personal loan has become very easy. You can now avail loans instantly on your smart phones. Furthermore, you can use a number of tools such as interest rate calculator to determine the not just the interest rate but also the best EMIs. Interest rate calculator can be highly beneficial as it provides you with a road map that you can follow to manage your financial situation. But, do you know what type of method is used to calculate the interest. Some may claim that it is simple interest while others may claim that it compound interest. So, which one is it?

Simple & Compound or Flat Interest Rate or Reducing Balance?

If you were to look at how the EMI is calculated on loans then you cannot divide it into simple interest rate and compound interest. The reason for this is that you as the borrower do not have to deal with the aspects of simple interest or compound interest. So, if the EMIs are not calculated based on simple interest or compound interest then what methods are used to calculate them?

Two methods are used to calculate EMIs based on the type of the loan. The two methods of calculating EMIs are Flat interest rate method and Reducing balance method. The flat interest method is used for car and two-wheeler loans while the reducing balance method is used for other loans. You can find interest rate calculator for both methods online, but the formulas used by those calculators are:

The formula for calculating EMI using flat interest rate is:

EMI = (Principal + Interest)/Period in Months

The formula for calculating EMI using reducing balance method is:

EMI = [P x R x (1+R)^N]/[{(1+R)^N}-1]

Here, P = Principal Loan Amount is P, the

R = Rate of Interest (on a monthly basis)

N = Tenure of the loan (duration in months)

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