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On availing of a personal loan, you are expected to repay the principal amount along with a certain percentage as interest levied by the loan provider. The payment of this amount is spread throughout the tenure of your loan.
The total interest payable throughout the tenure is an important factor to be taken into consideration because it can significantly increase the total sum payable to the lender.
EMI is calculated using the below formulae: -
EMI = P x R x (1+R)^N / [(1+R)^N-1]
P - Principal
R - Rate of Interest (Monthly)
N - Loan Tenure
The Interest Rate is calculated monthly. If the ROI is 6%, then the calculation is
R - 6/12/100 = 0.005
Here is a simplified example.
If a loan amount of INR 20,00,000 at an annual ROI of 6% for 20 years, then the EMI is:
EMI = 20,00,000 * 0.005 * (1+0.005)240 / ((1+0.005)240-1) = INR 14,329
Therefore, the total payable amount is INR 14,329 * 240 = INR 34,38,960. The Interest amount is: INR 34,38,960 - INR 20,00,000 = INR 14,38,960.
If you would like to know the interest component of your EMI for a particular month/installment, you can use the IPMT formula in Microsoft Excel. The formula is as follows
=IPMT(rate, per, nper, pv, [fv],[type])
rate = the rate of interest. Thus, if you are being charged 12% annually, you need to enter 12%/12 for this field if you are calculating on a monthly basis.
per = the instalment or month for which you are calculating the interest component
nper = the overall loan tenure (in terms of number of EMIs)
pv = principal / loan amount
[fv] = this is an optional field and refers to the desired cash balance at the end of the loan tenure. Typically, this is set to 0
[type] = this can be 0 or 1 depending on whether the payment is being made at the beginning or end of the month
Here’s a working example for your reference
For subsequent months, the interest will be calculated on the new loan balance (also known as principal amount outstanding). The new loan balance is calculated as follows:
Loan paid - Principal already paid
The total interest payable is the sum of interest paid over the tenure of the loan.
While the Central Bank regulates the rate of interest, the rate of interest charged by different loan providers is calculated taking into account different factors like:
This score is a reflection of your creditworthiness. The minimum CIBIL score for availing a personal loan varies according to the internal policies of the lender.
Your chances of obtaining a larger amount are higher for lenders with a good repayment history.
The shorter the repayment tenure, the lesser the total interest to be paid.
It is advisable to have a clear idea about the terms and conditions and the interest payable to be able to shortlist a provider best suited to your needs. Log into the website of a loan provider, enter the details required in the personal loan calculator to help you calculate the interest and monthly installments. Make sure to invest adequate time on researching offers provided by different providers since a loan, like any other financial decision, causes a deep impact on your financial health.
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