By continuing, you agree to LoansJagat's Credit Report Terms of Use, Terms and Conditions, Privacy Policy, and authorize contact via Call, SMS, Email, or WhatsApp
The information published on LoansJagat is intended for general informational and educational purposes only and should not be considered financial, legal, or investment advice. Interest rates, loan terms, statistics, and other data may change over time and may vary by lender or source. Please verify the latest information and consult a qualified financial advisor or the respective Bank/NBFC before making any financial decisions.
Subscribe Now
About the author
Anishka Bhadly
Anishka Bhadly is a content writer with a finance and business background. She has completed her bachelor's degree with a specialisation in finance and is currently pursuing an MBA in the finance field too. The knowledge she has gained from her studies and experience working with EdTech companies helped her combine theoretical knowledge with practical industry insight. Her expertise lies in creating well-researched, informative, and reader-friendly content in various banking, personal finance, loans, insurance, and investment-related topics.
Related Blog Post
Simplify All Your Loans Into One Affordable EMI
Customers Served
Debt Consolidated
1200+ Reviews
Locations in India
Club all Loans & Credit Card Bills into Single EMI
Quick Apply Loan
Consolidate your debts into one easy EMI.
Takes less than 2 minutes. No paperwork.
10 Lakhs+
Trusted Customers
2000 Cr+
Loans Disbursed
4.7/5
Google Reviews
50+
Banks & NBFCs Offers
Other services mentioned in this article
The interest rate decides the amount of money paid by the borrower to the lender apart from the amount that was borrowed. For calculating this rate, different methods can be used by the lenders in accordance with the type of loan. Simple interest differs from the reducing-balance method. In the case of the latter, the interest on a loan paid back through EMIs is calculated on the outstanding amount. By understanding the manner in which the rate is calculated, one can have an estimate of the liability and evaluate options before arriving at a decision on taking a loan.
Loan interest may accrue following various methods depending on the products and terms of each lender. In particular, the flat-rate and the reducing-balance methods are two ways used in determining interest on a loan. Being able to distinguish the two allows one to see which would incur less interest over the time of a loan agreement.
[P × r × (1 + r)^n] / [(1 + r)^n – 1]
Example
₹100,000 for 2 years at 10% interest rate
Interest = ₹100,000 x 10% x 2
= ₹ 20,000.
₹100,000 at 10% annually for 2 years
Here, the monthly EMI would be approximately ₹4,614, whereas the total interest would be approximately ₹10,743.
In both of the formulas:
The amount of the loan and the repayment period are also important considerations. While a longer tenure may result in higher total interest paid, secured loans with large sums of money may have better rates.
Credit score is a vital element that determines the interest rate for a loan. It indicates a borrower’s reliability and ability to repay the loan. A good credit score ensures that one has a higher chance of getting a loan with a lower rate.
Formula
For example, for a ₹100,000 loan at 10% per annum for 24 months, the monthly interest rate will be approximately 0.8333%, and the total number of instalments is 24. Through the EMI formula, we can calculate EMI, which is approximately ₹4,614. So, the total amount to be repaid in 24 months is ₹110,743. Thus, the total interest paid is ₹10,743.
Borrowers must note that the reducing-balance method is not the only way to calculate interest rates on loans. Depending on the nature of the loan, its conditions, and the lender, different methods may be used. It is always necessary to clarify with the lender how the particular loan to be taken is calculated. In addition, there are online loan calculators that can help you find out how much EMI you have to pay each month and what the total amount of interest and repayment of the loan will be at the end, taking into account the loan amount, interest rate, and term.
Disclaimer: The above examples are just for educational purposes; reach out to your bank for accurate information.
Loan interest rates are not the same for all borrowers. There are several factors that lenders consider when determining the interest rate for a loan, such as credit history, loan type, income, tenure, and market conditions, among others.
*T&C Apply
The type of loan also influences the interest rate. For example, secured loans such as home loans have better rates than unsecured loans like personal loans.
The prevailing market conditions also play a role in determining the interest rates. Some of the conditions that affect rates include inflation, the repo rate, and other monetary policies.
Different lenders have their own policies when it comes to approving loans and setting the interest rates. Factors such as income, occupation, and credit history may affect the rates. Additionally, the repayment history and other existing debts also matter.
The factors discussed above determine the interest rate that one will be charged when taking a loan. Understanding the factors that influence the rates can help one know where to get a loan and the amount they will be charged to repay the loan.
Understanding how to calculate loan interest rates helps in taking the borrowing decision with greater confidence. Although the simple formula for calculating simple interest could give you an idea of what to expect, most loans are repaid through EMIs on a reducing balance basis. This implies that the interest payable on such loans reduces as you start repaying the principal amount. Therefore, you must calculate the EMI, total interest payable and total repayment amount before taking the loan. Moreover, you should also factor in costs such as processing fees and prepayment charges while comparing the rates between various lenders.
The formula depends on the type of interest rate. If it's simple interest, you can apply the formula:
Principal × Rate × Time ÷ 100
Most EMI repayments are calculated using the reducing-balance method.
The rate at which the bank or financial institution charges the borrower for the money lent. It's a percentage of the principal.
At an annual interest rate, 7% on ₹100,000 would accrue ₹7,000 in interest.
A 4% interest rate is relatively low for many kinds of loans; however, it's not a definitive indicator of whether the deal is a good one.
A high interest rate, on the contrary, may suggest that the risk is higher, which might result in higher repayment amounts over time.
No, it varies depending on the bank's policies and your eligibility.
Loan interest rates are commonly quoted as annual rates, while EMI calculations generally use a periodic rate based on the lender’s terms.
None of them are better compared to the other. You have to check the annualised rate as well as the total amount to be paid.
Why is the periodic interest rate used for monthly EMIs different from the annual interest rate?
The annual rate is divided by 12 to get the monthly rate, but it depends on how the rates are declared by the lender.
It depends on the loan scheme. In a fixed-rate loan the rate remains the same, whereas in the case of floating-rate loans the rate is subject to change if the reference rate or the rate declared by the bank changes.
