Personal Loan Interest Rate
Here, we explain about personal loan interest rate, how an EMI is calculated, how interest is calculated, the meaning of reducing interest rate on personal loans, eligibility and the benefits of using a personal loan EMI calculator.
What is a personal loan interest rate?
Once a borrower raises a loan from a lender, s/he is supposed to pay an interest at a predetermined rate.
The interest rate varies and differs based on a slew of factors. Typically, the interest rate on personal loans is higher as compared to other categories of loans such as a car loan or a home loan.
The personal loan interest rate is a function of a number of factors such as the bank you opt for, your overall profile, your credit score, your monthly salary, among other factors.
Personal Loan
Let us understand more on this here:
How is the interest calculated?
Borrowers are meant to pay interest to the bank on the loan they borrow and it is then added as part of the equated monthly instalment (EMI), which also comprises the principal amount. A simple formula to calculate personal loan interest rate is this:
principal (P) X rate of interest (R) X duration in years (T) / 12.
This effectively means
Monthly interest = P X R X T/12
Let us understand this with the help of an example here:
Loan amount ₹5 lakh
Rate of interest = 10 percent
Annual interest = 10/100 X 5,00,000 = ₹50,000
Interest for a month = 50,000/12 = ₹4,167
Interest added to the EMI: ₹4,167
Fixed Interest Rate vs Floating Interest Rate
The personal loan interest which has been calculated above is based on ‘fixed interest rate’ and is calculated on the basis of outstanding amount at the start of the loan tenure.
There are two types of personal loan interest rates. One is fixed interest rate, also known as flat interest rate, and the other is floating interest rate.
As the name suggests, fixed interest rate is the rate of interest that borrowers have to pay regardless of the prevailing rates of interest in the market. On the contrary, floating interest rate is the rate which fluctuates along with the current lending rates offered by the banks.
What does it mean by reducing interest rates on personal loans?
In case of reducing interest rate scenario, interest is calculated on the basis of outstanding principal. As the outstanding principal declines with each EMI, the interest rate also falls proportionately in the reducing interest rate scenario.
Put simply, the personal loan interest rate is calculated on the amount of loan outstanding at the end of a certain period, say a month. Some part of each EMI paid is applied to the principal, while the remainder is applied to interest.
At the time of computing interest, the next calculation is based on the outstanding principal instead of the principal at the start of loan tenure.
Personal Loan Eligibility
In order to be eligible for personal loan, you need to have a regular income which can be proved with the help of an income statement such as a salary slip or income tax return (ITR). Other factors could be age, income, credit score, availability of necessary documents and bank account details.
Personal Loan Eligibility
Age: Typically, banks lend loans to applicants within their working life (21-65) and not to the ones who are either too young or too old to repay the loan. For instance, a personal loan with loan repayment of 5 years would be given to someone who has at least five years of employment left.
Income: Borrowers should have bare minimum income to be able to borrow loan. Salaried borrowers should have a minimum income of ₹15,000 to be able to apply for personal loan.
Credit score: The credit score (also known as CIBIL score) is scored between 300-900 but in order to be eligible for a loan, one should have a credit score of at least 600.
Necessary documents: The borrower should have the necessary documents in order to apply for personal loan which include PAN, bank statement and salary slips (if applicable).
Bank account details: Sometimes lenders require permission to auto debit your bank account in order to deduct the EMI, so the borrower needs to submit the details with regards to the bank account.
How to get the lowest interest rate on a Personal Loan?
One thing to keep in mind is to maintain a good credit score. The rationale is simple. The higher the credit score, the lower the interest rate. And alternatively, lower the credit score, higher would be the credit score.
What is a Personal Loan EMI Calculator?
A personal loan EMI calculator is a tool that helps loan seekers calculate their monthly loan repayments. It considers the loan amount, interest rate, and loan tenure to calculate the EMI.
The calculator gives a fair picture of how much a borrower needs to pay each month. Ideally, you should calculate your monthly payout with the help of an EMI calculator.
This helps you ascertain the amount that you need to pay every month in order to service the loan and return it partially on a regular basis.
You can click the following link of Personal loan EMI calculator to compute the monthly EMI. All you need to do is to enter these details: loan amount, rate of interest and loan duration.
Personal Loan EMI Calculator
Personal Loan EMI Calculator
Loan Amount
₹
Rate of Interest
%
Loan Duration
Months
EMI Payment Schedule
Benefits of Using a Personal Loan EMI Calculator
These are some of the key benefits of using a personal loan EMI calculator:
Helps in planning
Using an EMI calculator helps borrowers ensure accurate financial planning. Borrowers can determine if they can afford the loan and plan their monthly budget accordingly.
Time-Saving
If you try to calculate EMI manually, it can turn out to be time-consuming and is prone to errors. An EMI calculator gives immediate and accurate results, thus saving time and effort.
Inculcates financial discipline
If you know the exact EMI amount, it helps you maintain financial discipline. It helps borrowers set aside the required amount each month, thus reducing the risk of defaulting on payments.
Factors determining the EMI
These are the three key factors which determine the loan EMI:
- Loan Amount: For obvious reasons, the amount you borrow directly impacts the amount of EMI that you are supposed to pay. This effectively means higher the loan amount, higher the EMI. And conversely, lower the amount of loan, smaller the EMI. So, borrowers should first evaluate their financial needs and then borrow what they can easily repay.
- Interest Rate: Another factor that impacts the EMI is the rate of interest. When the interest rate is lower, EMI remains small, making the loan more affordable. Borrowers are expected to compare interest rates from different lenders before choosing the best deal.
- Tenure of loan: The loan tenure also affects the EMI. A longer tenure reduces the EMI but increases the total interest payable. Conversely, a shorter tenure pushes the EMI higher, but brings down the total interest. Borrowers should choose a tenure that balances their monthly budget and total interest costs.
Personal Loan Interest Rate FAQs
What is a personal loan?
A multi-purpose unsecured loan taken from a bank or a financial institution to meet a variety of expenses is known as a personal loan.
How is it different from other categories of loan such as car and home loan?
This is different in more ways than one. One of the key differences is that it does not need collateral and usually carries a higher rate of interest.
How can you apply for a personal loan?
You can visit a bank website and apply for a personal loan directly.
Why are interest rates higher for personal loans?
Interest rates are higher for a personal loan because it does not generally need collateral and is considered riskier for banks when compared to other secured loans such as a car loan and a house loan.
What are the documents required to apply for a personal loan?
The key documents required to apply for personal loan are 3-month salary slips, bank statement, PAN card and identification ID such as aadhaar.