On May 4, 2022, the RBI increased the repo rate by 40 basis points (bps). Now, the current repo rate stands at 4.40% (from 4%). A hike in the repo rate makes borrowing costlier as financial institution mimics the same by increasing interest rates.
Hence, individuals willing to avail of a personal loan must know the total interest outgo and expense. For this, one can rely on an interest rate calculator. Read on to learn how to use such a calculator, benefits and related things.
What is an Interest Rate Calculator
An interest rate calculator is an online tool that allows loan applicants to compute monthly payable interest and EMIs. With an interest calculator, individuals can calculate their liabilities and manage their finances strategically.
As loan applicants are aware of the purpose of the interest rate calculator, they must know the process to use it.
How to Use an Interest Rate Calculator?
Step 1 – Visit the official website of the chosen lending institution
Step 2 – Navigate to the personal loan interest calculator section
Step 3 – Enter the principal amount, interest rate and repayment tenor in the respective field. Please note that individuals have to enter repayment tenor in months.
Step 4 – Click on ‘Apply Now. Results will appear on the screen.
The EMI calculator will show total interest payable, total outstanding payment, and loan EMI.
While obtaining a loan or personal financing, individuals must keep in mind that there are certain factors that affect their personal loan interest rates.
The meaning of personal loan or personal financing is known to everyone. It is unsecured financing, meaning borrowers need not pledge collateral to lenders. Individuals can utilise this credit facility to tackle many personal expenses efficiently.
Since it is unsecured financing, lenders usually charge a higher interest rate. Therefore to avail better interest rates for their personal loan, individuals can work on improving credit scores and limit the habit of frequent borrowing.
Read also: how to manage your finance
The formula used in the interest rate calculator
The interest rate calculator follows this formula:
EMI = P X r x (1+ r) ^ n / {(1 + r) ^ n -1}
Here,
P = Principal amount
r = Interest rate
n = Tenor in months
The following example will help individuals understand the working process, i.e., interest calculation of this formula.
Suppose an individual has availed of personal financing of Rs.15 lakh for 4 years, and the lender has settled for personal loan rates of 13%. Therefore, as per the above-mentioned formula, that individual have to pay total interest of Rs.4,31,580. Total borrowing cost would be Rs.15,00,000 + 4,31,580 = Rs.19,31,50 and EMI would stand at Rs.40,241.
Individuals can also use a personal loan EMI calculator to compute the EMI amount. Apart from showing the necessary details, this calculator allows loan applicants to view repayment schedules and check EMIs.
Benefits of using an interest rate calculator
The benefits of using an interest rate are multifaceted. This calculator displays accurate results, and borrowers can access it 24/7 without investing any penny. In addition, this online tool saves time as individuals need not visit the lending institution to evaluate total interest payable, EMI, etc.
Apart from these, the interest rate calculator assists borrowers in several ways. These are discussed below:
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Evaluate monthly payable
When individuals deal with multiple loans or credit cards, adjusting the repayments in a monthly budget can be overwhelming.
In such cases, if an individual decides to take another financial product, such as a personal loan, he/she will have to plan for personal loan EMI repayment and fit it in the list of monthly payables with other payments. Here, the interest rate calculator can help borrowers assess EMIs beforehand and plan accordingly.
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Opt for a suitable tenor
Interest rate and tenor are co-related. For lenders, a shorter tenor poses a lower risk; hence, they offer lower interest rates to borrowers and vice versa.
This affects monthly payables as individuals have to pay a big chunk of money every month. On the other hand, borrowers have to pay lower EMI if they opt for a longer tenor, but the total interest outgo will increase. This fiasco can be resolved with an interest rate calculator as it allows individuals to adjust tenor and see the changes in EMI amount and total interest payable.
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Settle for the best rate
Settling for a suitable interest rate is the primary target for every loan applicant. Minor changes in interest rate can mount up to a significant total loan amount at the end of the loan tenor.
Different lenders offer loans at different rates. Using an interest rate calculator, loan applicants can tally rates offered by various lenders and settle for the one that meets their financial capabilities.
Reputed financial institutions offer high-value personal loans at competitive interest rates. Financial institutions also extend pre-approved offers to streamline the loan availing process. These offers are also available for different financial products, such as personal loans, credit cards, business loans, etc. Individuals can check their pre-approved offers by entering names and contact details.
Conclusion
Interest rate is one of the most important aspects of the Indian loan market. It influences the cost of borrowing as well as the demand for various financial products. Therefore, individuals must use an interest rate calculator to secure a financial product at the best rate and manage expenses seamlessly.
Read Also: A Step-By-Step Guide to Using a Personal Loan Calculator
