Calculating the interest rates of personal loans is not always simple. One of the biggest confusions surrounding it comes from the term getting interchanged with APR. The concepts ‘interest rate’ and ‘APR’ aren’t too different when used to calculate interest on personal loans. But if you need to calculate how much a loan costs, then you need to know the difference between the advertised interest rate and the APR, which is all the extra costs and the fees put together.
Interest Rate VS APR: What Is The Difference?
Interest rate is the percentage of the principal charged by the lender. The principal is the total loan amount. Annual Percentage Rate (APR) is always greater than the interest. It includes the interest charged on the loan plus all expenses of procuring the loan including the various fees – from processing fees to the brokerage and closing fees. APR is the total loan cost. However, you can use an online personal loan interest calculator usually available at the lender’s site to get a clear idea about the interest and APR.
Fixed Or Flat Rate
There are two ways to calculate rates of interest: one, by using a flat and unchanging interest rate, and two, by resorting to the falling interest rate. The first method is the flat unwavering interest rate which was the preferred method for an instant personal loan for a long time. It’s also called the “fixed interest rate” method. In this method, the interest rate is charged on the full loan— the principal. The interest on the principal is calculated for every month, preferably with a personal loan interest calculator. So, the total interest on the principal amount is calculated and the sum arrived at is divided equally in accordance with the repayment period. Because the interest rate is flat, the EMI remains fixed for the whole repayment period.
Falling Rate Method
With this method, the interest rate falls with every passing month. Interest is billed on the outstanding loan amount left after every passing month. The monthly EMI on instant personal loans includes interest plus a portion of the principal amount. What happens is both principal and interest on the principal amount left keep falling. The interest portion in the EMI is also a decreasing amount in every subsequent EMI. Ergo, it is called the reducing rate method.
Factors That Determine The Interest Rates
There are several factors that influence interest rates. One of them is competition among lenders. In some types of loans, the central bank governs interest rates while in other types of loans lenders can decide the interest rate, which is practically tied to market forces.
There are different interest rates for different loan types. Use the personal loan interest calculator to figure out the details of the loan you are planning to take. Personal loan interest rates are usually on the higher side. The reason: They are unsecured, without collateral. Interest on the car and home loans are lower.
How To Calculate The Interest Rate
Personal loans allow a degree of negotiating power on the rate of interest. Such liberty, however, is missing when it comes to car loans. That being said, the interest rate on a personal loan is arrived at by each bank by taking into consideration several essential factors. These may include the principal amount, tenure of the personal loan, repayment plan, the type of employment and current financial status of the personal loan beneficiary, credit score, current income, age, and work experience.
By the way, there is a formula you can apply to calculate the interest rate on personal loan: Interest equals the Loan Principal multiplied by the Interest Rate (on a monthly basis).
Additional Read: Who Can Take a Debt Consolidation Loan?
This blog covered the various pointers to consider while calculating the interest rate on a personal loan. Fortunately, you can take the help of technology in this process. There is a personal loan interest calculator for figuring out your interest rate, and there is also the personal loan eligibility calculator.
Usually, you are able to negotiate the rate of interest that you need to pay, but that depends on whether you have cleared outstanding dues; if your current professional life is without troubles if you have a steady and working co-applicant. Last, if your credit score is on an improvement path, you should be able to secure a loan that demands a comfortable interest rate.