Desktop-Image-6How-Is-Interest-Rate-Calculated-on-PL

How is Interest Rate Calculated on Personal Loan

July 08, 2023 • 1534 views

A Personal Loan is a type of loan that you can avail yourself of without having to pledge any security. During the loan tenure, you are required to pay back the borrowed amount to the lender in monthly instalments. This sum is paid back with an interest rate. It is a crucial element that you should consider before opting for a Personal Loan. With a good lender like Poonawalla Fincorp, you can avail of a Personal Loan at an attractive and low-interest rate starting from just 9.99%*. Let’s look at how to calculate the interest rate on a loan.

What is an Interest Rate?

An interest rate is a percentage charged on the principal amount i.e., the amount borrowed. A borrower pays the interest rate as compensation for the use of the lender’s money. In terms of Personal Loan interest rates, there are two main types: fixed rates and floating rates.

Fixed Interest Rate

As the name suggests, the interest rate remains the same for the entire tenure under this type. However, as compared to a flexible rate, it costs a little bit higher. Even in the case of policy changes, a fixed interest rate remains the same. This type of interest rate is perfect for someone who prefers stability. Moreover, your EMI amount will also remain constant throughout the loan tenure.

Floating Interest Rate

Under this type of Personal Loan interest rate, the rate changes or fluctuates as per the financial market conditions. This is suitable for individuals who do not shy away from a little risk. Your monthly EMI amount may also change during the loan tenure.

Factors Affecting the Interest Rate on Personal Loan

Listed below are the 5 crucial factors that have a significant impact on how to calculate Personal Loan interest.

Credit Score

The credit or CIBIL score is a crucial deciding factor when it comes to your interest rate. It is a three-digit number ranging between 300-900, and the closer your score is to 900, the better it is. Your credit score determines your creditworthiness and assures the lender that you are a trusted borrower. If you have a credit score of 700 or above, you will surely get a lower interest rate along with long repayment tenure. On the other hand, if you have a low credit score, your lender might approve your loan but at a high-interest rate.

Income

To avail of a Personal Loan with an attractive and low-interest rate, you must have a monthly income of Rs.30,000. It shows that you are capable and financially stable of paying off your monthly EMIs.

Credit History

It is necessary to have a lengthy and strong credit history. While reviewing your loan application and determining the interest rate, your lender will analyze your credit history. Make sure to make timely debt, credit card or EMI payments; missing out on even one payment can hurt your credit score and history.

Debt

Your existing debt is also a crucial deciding factor for the interest rate on your Personal Loan. Make sure not to seem credit hungry and pay off your existing debt before applying for a new loan. This also impacts your credit score.

Relationship with the Lender

Your relationship with the lender also impacts your interest rate on your Personal Loan. If the lender is well-versed in your credit history, they might offer you a loan at a lower interest rate considering you as a low-risk borrower.

It is imperative that you keep these points in mind to get clarification on how to calculate interest on the loan.

Calculation of Interest Rate on Personal Loan

There are a few factors that are considered while calculating your interest rate. Your Personal Loan interest rate is necessary as it helps you determine your monthly EMI amount.

You can use the formula to calculate interest on loan 

A = P (1 + r/n) nt

Where,

P stands for the principal amount, which is the borrowed amount,

R is the rate of interest,

n is the number of times the interest is compounded each year,

t is the time in years.

Moreover, you must plan your loan amount and monthly EMI efficiently. To do this, you can use Poonawalla Fincorp’s online loan EMI calculator, using which you can test different interest rates and choose the one that aligns with your financial health.

Conclusion

Several factors impact your Personal Loan interest rate. Moreover, for anyone planning to take out a loan, it is necessary to understand these factors. A lower interest rate can lead to a substantial difference in the total cost of the loan. Make sure to regularly check and improve your credit score, make timely debt repayments, and enhance your creditworthiness by being financially responsible. By preparing yourself with knowledge and taking proactive steps, you can confidently navigate the world of Personal Loans, ensuring your financial well-being and attaining your objectives.

FAQs

  • Is Personal Loan interest calculated daily?

The interest rate is calculated and paid monthly. It is calculated based on factors like your credit score, credit history, repayment track, monthly salary, and loan amount.

Here is how you can calculate loan interest percentage: Use the formula - A = P (1 + r/n) nt. Moreover, after your interest rate is calculated, you can also service the EMI amount.

  • How can I lower my Personal Loan interest rate?

To get a lower Personal Loan interest rate, there are a few habits that you can inculcate

  • Maintaining a good CIBIL score of 750 or above.
  • Make timely debt repayments.
  • Have a stable income as a salaried employee.
  • Have a good credit and repayment history.

*T&C Apply

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Personal Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

Trending Topics



Contact Us logo Quick Apply CIBIL Score logo Free CIBIL Whatsapp logo Connect on WhatsApp