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What is Broken Period Interest and How is it Calculated?
Did you know you might be paying interest on a loan before your first official payment is due? This unexpected cost is called broken period interest. Read on to know what this type of interest is, how it applies to a Personal Loan, and how to avoid any surprises when taking out a loan.
Broken period interest refers to the interest charged on a loan if the gap between the loan disbursal time and the due date of your first regular instalment (EMI) is more.
Financial institutions calculate the broken period interest due based on the total time you have on the loan. Since the interest accumulates from the day you get the funds credited to your account, a gap between disbursement and the first payment creates a "broken period". This does not fit a typical instalment structure, which is why lenders charge this type of interest.
A Personal Loan is a common example where broken period interest usually applies. Let us say you get approved for a Personal Loan of Rs. 1,00,000 on April 1st, but your first payment is not due until May 1st. If the loan has a 10% annual percentage rate (APR), you will accrue interest for the 30 days between disbursement and the first payment.
Here is a breakdown of the calculation of the broken period interest calculator:
Monthly interest rate= APR / 365 days x 30
Monthly interest rate for 10% APR= 10% / 365 x 30 = 0.82%
Interest for 30 days= Rs. 1,00,000 (loan amount) x 0.82% = Rs. 820
Therefore, in this scenario, you would owe Rs. 820 in broken period interest along with your first regular payment on May 1st.
Also Read - Fixed Or Floating Interest Rate - Which Is Better For Personal Loan?
There are a few ways lenders might collect broken period interest:
1. Upfront: The lender deducts this interest from the disbursed loan amount. In the example above, you might only receive Rs. 99,180 instead of the full Rs. 1,00,000.
2. Added to the First Payment: The broken period interest is added to your first regular instalment. In our example, your first payment on May 1st would be Rs. 820 (broken period interest) + your monthly payment amount.
3. Separate Instalment: The lender might issue a separate instalment for the interest before your first regular payment is due.
4. Adjusted with the First EMI: The lender will adjust the interest amount in your first EMI. It will not affect your total loan amount, and you will receive the total loan amount you applied for.
Also Read - How to Calculate Interest Rate Per Month?
Understanding broken period interest can help you make informed decisions when taking out a loan. By being aware of this cost, you can factor it into your budget and avoid any surprises while paying your first EMI. Talk to your lender to know if you need to pay this interest and the exact amount.
1. Is broken period interest a type of second interest on a Personal Loan?
No, broken period interest is not a separate or additional interest rate on a Personal Loan. It is the calculated interest for the initial period before your regular payments begin.
2. How do you calculate broken period interest?
You can calculate broken period interest using the formula of: Periodic interest rate x Loan amount x Number of days between disbursement and first payment. Most lenders will disclose this information in your loan agreement or provide a breakdown of when the loan is funded.
3. Is broken period interest calculated on all types of loans?
Yes, broken period interest is applicable to all types of loans. This type of interest typically applies to loans with a disbursement date separate from the first payment due date.
4. Is broken period interest the same as gap interest?
Yes, the terms ‘broken period interest’ and ‘gap interest’ are often used interchangeably. Both terms refer to the interest charged for the initial period before regular loan payments begin.
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. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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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.
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