Get to know how a personal loan interest rate is calculated

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Personal loan repayment has two constituents – principal and interest. Interest constituent on a personal loan is a separate component levied as a fee for providing the required loan proceeds by the lender. This charge must be paid periodically by you i.e., the borrower on the outstanding personal loan proceeds.

As the personal loan interest rate is a charge levied on the proceeds borrowed by you, it is crucial for you to compute the overall interest constituent you require paying over the repayment tenure. Ensure to opt for the lowest personal loan rate and shortest loan tenure as per your repayment capacity to reduce substantially your overall interest cost incurred on a personal loan.

For computing a feasible personal loan interest rate and tenure based on the proceeds required, you can use an online personal loan EMI calculator. Once you are aware of the suitable personal loan figures, you can approach the preferred lender to negotiate for the same deal on loan. Read on here to understand how the personal loan interest rate is computed before opting for a lender.

How is the personal loan rate computed?

Lenders generally offer loans with a specific interest rate after reviewing your personal loan eligibility like your credit score, income, debt-to-income ratio, repayment potential, past credit record, employer, etc. As various parameters are considered for determining your personal loan rate, the final offered rate may vary from one lender to another. However, note that if you hold a higher credit score, longer repayment tenure and a smaller principal component, then you hold a higher chance of attracting a lower personal loan rate.

To compute your personal loan EMI as per the offered personal loan rate, you may use the below-mentioned EMI formula.

Personal loan EMI = [p x r x (1 + r) ^ n]/ [(1 + r) ^ n – 1]

Here, EMI stands for equated monthly instalments, p is the principal proceeds availed, r is the personal loan rate and n is the loan repayment tenure in months.

Let’s suppose you have applied for personal loan proceeds of Rs 5 lakh with the rate of interest of 15 per cent per annum for a repayment tenure of five years.

Here, p = Rs 5 lakh, r= 15 per cent, n = 5 years, or 60 months

Using the personal loan EMI formula, you can compute the interest component i.e., Rs 6250.

EMI in a personal loan is a combination of principal and interest constituents. Here, the principal component is Rs 6180, and the interest constituent is Rs 6,250. Thus, the EMI amount is Rs 12,430.

To conclude

Instead of computing your personal loan EMI manually using a formula, you can save time and effort by using an online personal loan EMI calculator. Such online calculators compute the EMI and overall interest outgo instantly in just seconds, which allows you to make an informed decision after reviewing various figure combinations. Besides this, by using the online calculator you also tend to eliminate the risk of incorrect calculations, which is possible in the case of manual calculations.