An unsecured loan that may be received without security or collateral is known as a personal loan. It is rather simple to get approved for a personal loan if you have all the required documents and a high credit score. Compared to any other loan, a personal loan has two parts that must be repaid: the principal amount and interest charges.
In addition to the principal loan sum, there is an additional charge for interest on the loan sum, which is a distinct part. Let’s understand and review how a personal loan’s interest rate is calculated.
Personal Loan Interest Rate: What Does It Mean?
The interest rate is the amount that the lender charges as a yearly percentage of the remaining balance on a personal loan. The borrowing party makes monthly interest payments. The interest rate is computed by taking into account the individual’s paycheck, loan sum, credit score, and credit history. On average, the interest rate on personal loans might range from 10% to 20%.
How to Calculate Interest on a Personal Loan?
Interest = Principal x Interest Rate is the standard formula used to calculate interest.
Let’s Have a Look at the Scenario Below to Understand the Interest Part Better!
Rohit takes out a personal loan for INR 2 lakh, which has a 15% annual interest rate and must be repaid in 60 months or five years.
Interest calculated monthly as 200000 x 0.15/12 = INR 2500
Principal due each month = INR 8333.33
Interest Charges + Principal = Total EMI
In this instance, Rohit will be required to pay INR 10833.33(Rs. 8333.33+Rs. 2500.00) for the initial thirty-day EMI.
The interest for the next month will now be computed using the updated balance of (200000-8333.33) 191666.67.
Likewise, each month’s interest is computed on the amount of the new remaining balance. This is calculated by deducting the average monthly principal from the whole sum of the loan.
How Will You Calculate the Monthly Interest Rate on a Personal Loan?
The rate of interest that you’re offered is the most important component of your personal loan. In terms of information, this is a vital part to look into when you select a financial organization to take out a personal loan. Because interest rates are always provided on a yearly basis. You have to break it into a rate for every month. As soon as you come to know about the interest rate, you can compute the EMI using an EMI calculator.
To do this, you should apply the following formula:
Monthly Interest Rate = Offered Interest Rate/12
For instance, if the yearly interest rate on your loan is 18% p.a., the monthly interest rate has to be determined as follows.
18/12 is equivalent to 1.5.
This indicates that a 1.5% monthly interest rate is going to be applied.
How to Use Your Personal Loan Interest Rate to Calculate your EMI Amount
You must apply a standard formula to check the EMI of your personal loan.
The formula mentioned below is used to figure out the EMI Amount
EMI is equal to Px(R/100) x (1+ (R/100)^N) / [(1+R/100)^N-1].
Equated Monthly Installments, or EMI
P= Amount of principal obtained
R = interest rate on personal loans
N= The loan’s term in months
Suppose, for illustration purposes, that you have taken out a personal loan of Rs. 5,00,000 with a five-year repayment period and an annual interest rate of 15%.
Here;
P is equal to Rs. 5,00,000.
R = 15% / 100 = 0.15 monthly
N is five years; 5×12 is sixty months.
You have to first figure out the amount of interest by using the calculation above as follows:
6,250 = 5,00,000×0.15/12
The total of the principal and interest amounts is known as the EMI.
In this case, the interest that must be paid is Rs. 6250, and the amount due as principal is Rs. 6179.81. As a result, the EMI would amount to Rs. 12429.81.
The loan repayment plan for a Rs. 1 lakh loan with a five-year repayment period at an annual interest rate of 9% is displayed in the chart below.
| Year | Principal | Interest | Total Payment | Total Balance |
| 2023 | Rs.16,584 | Rs.8,327 | Rs.24,911 | Rs.83,417 |
| 2024 | Rs.18,138 | Rs.6,772 | Rs.24,910 | Rs.65,278 |
| 2025 | Rs.19,839 | Rs.5,071 | Rs.24,910 | Rs.45,438 |
| 2026 | Rs.21,702 | Rs.3,209 | Rs.24,911 | Rs.23,737 |
| 2027 | Rs.23,737 | Rs.1,172 | Rs.24,909 | Rs.0 |
EMI for Personal Loans in 2024 from India’s Leading Banks
| Banks | Lowest EMI Per Lakh | Loan Tenure |
| SBI | Rs. 1,707 | 7 years |
| HDFC Bank | Rs. 2,174 | 5 years |
| Axis Bank | Rs. 2,224 | 5 years |
| CitiBank | Rs. 2,149 | 5 years |
| IOB | Rs. 2,237 | 5 years |
| SCB | Rs. 2,199 | 5 years |
| Kotak Mahindra | Rs. 2,174 | 5 years |
| Union Bank of India | Rs. 2,202 | 5 years |
| Karnataka Bank | Rs. 2,224 | 5 years |
How to Calculate the Total Interest Payable on a Personal Loan?
The total interest charged for a year can be calculated by including the interest incurred over the entire year. You can make a personal monthly EMI calculator to monitor your repayment by figuring out how much interest you pay every month.
Particularly because there is no demand for collateral, interest rates on personal loans are typically higher than those on house or education loans. The supporting documentation is also extremely low because no collateral is needed.
With the introduction of paper-free loans in this digital age, the need for a drawn-out application procedure has been removed. With a simple online form that you submit after attaching scanned copies of your necessary paperwork based on your profile, it typically takes 1–7 days for your loan to be granted. In certain instances, the duration might be extended. When everything is analyzed, personal loans are a really simple, practical, and hassle-free way to get money right away.
What Aspects Could Impact the EMI on Your Personal Loan?
Loan Amount: The EMI payable increases with the loan amount. The lender determines the maximum amount of money that you can get depending on several variables, including your ability to pay back the loan on time and the relationship you have with the financial institution.
Interest Rate: The interest rate, in this instance, is also directly correlated with the EMI. The EMI increases, as does the interest rate. The rate of interest on your loan will be decided by the financial institution based on a variety of criteria, including your earnings, credit history, ability to repay the money borrowed, etc.
Loan Term: The EMI and the loan term you select are inversely related. The EMI decreases with the length of tenure. The EMI decreases with the length of tenure. Longer tenure could, however, result in higher interest payments. Typically, a loan’s term options fall within the range of 12 to 84 months.
Advantages of Using an EMI Calculator for Personal Loans
The Following are Some Advantages of Utilizing an EMI Calculator for Personal Loans:
Take a Look at Several Loan Options: Change the interest rate and processing charge based on the rates set by the relevant bank and input a fixed loan size and term. This will provide you with a comprehensive understanding of the total expenses of your loan, and you can then select your loan package.
Conserve Time: EMI can be calculated in a minute or two using a calculator. EMI calculators are 100% accurate and quite simple to use.
Select the Term of the Loan that You Want: Compare your EMI for several loan terms to see which is best for your financial situation. Choose a term that is shorter if you are willing to pay higher EMIs and prefer paying off your loan sooner. If not, you may opt for a longer term.
Look into Your Repayment Plan: The personal loan EMI calculator from Refer Loan also provides you with a detailed breakdown of your repayment plan. In this manner, you will be able to calculate the interest you must reimburse as well as the amount of your outstanding principal.
Check the EMI Details: Utilizing an EMI calculator, you may verify the repayment plan provided by the financial institution. In addition, you can use a calculator to figure out the processing charge that is required upfront and is often subtracted from the approved amount.
Refer Loan’s Personal Loan EMI Calculators Offer the Following Advantages:
Simple to Use: The tool is easy to use and offers sufficient assistance, making it possible for the lender to comprehend the goals at every step. Decide on the desired amount for your loan, then choose the interest rate and length of the loan. Your interest rate is computed automatically.
Time-saver: Rather than doing calculations by hand, these speedy loan calculators do the calculations for you.
Accurate Outcomes: Unlike manual options, which often result in mistakes, these automated EMI calculators are 100% accurate and generate no mistakes.
Enables Smarter Planning: As soon as you comprehend how the interest and principal on the total amount of the loan are calculated for each EMI, you can make appropriate plans.
Can Anyone Make EMI Payments in One Go?
Yes, you can do that if you’re talking about foreclosure or prepayment. However, the terms for repaying a personal loan vary across institutions. For example, HDFC only permits prepayment when 12 EMIs are paid in full.
Additionally, according to the lender’s decision at the time of pre-payment or foreclosure, a specific prepayment charge might be applied. Check the terms and conditions provided by your financial institution before choosing to prepay or move forward with foreclosure.
What Happens If Anyone Doesn’t Pay EMI Timely?
Always make your EMI payments on time. If you don’t make regular payments on your EMI, nearly all financial institutions will charge a penalty of 2%. Additionally, any late payments may lower your credit score and could make it more difficult to get loans in the future. To relieve financial strain, compute your EMI in advance with the personal loan’s EMI calculators.
Bottom Line:
It might be smart to always have your calculations ready. When you pick the best options according to your requirements, you can easily figure out the payable total interest amount. In the age of technology, personal loans are only a couple of mouse clicks away.
You can easily apply for personal loans on the Refer Loan platform. Feel the delight of getting funds transferred to your account within just a few days. You are certain to benefit from being able to take out a loan from the comforts of your dwelling.