How to calculate interest on loan using Bajaj Finserv interest calculator?
The online monthly interest calculator ensures quick computation on how to calculate interest and EMIs from the comfort of your home, without needing to manually input the interest calculator formula. Using a Bajaj Finance loan interest rate calculator is simple, with the interface being user-friendly. Here is how to use an interest rate calculator in three simple steps:
Step 1: Enter the loan amount you want to avail.
Step 2: Next, enter the rate of interest on your loan.
Step 3: Select the repayment period you wish to opt for and get accurate results instantly.
Using the manual formula reverse calculation is also possible, i.e., you can calculate rate of interest from EMI amount, tenure, and total amount.
Methods of calculating interest
The two primary methods of calculating the interest are simple interest rates and compound interest rates.
1. Simple interest
Simple interest is a straightforward method of calculating interest earned or paid on a principal amount. It remains constant throughout the period and is calculated solely on the initial principal. A higher simple interest rate on the principal amount can provide better returns on investments and vice versa. Unlike compound interest, there's no consideration of interest earned or paid in previous periods. It's commonly used for short-term loans or investments where interest doesn't compound over time.
Simple interest formula
Here is the mathematical formula, on which a simple interest calculator works to compute the loan amount:
A = P (1+RT)
To calculate Interest Paid on a loan, the formula is
Interest = A – P.
Where,
- A = Total Amount Paid
- P = Principal Amount
- R = Rate of Interest
- T = Number of years
Simple interest example
Suppose you borrow Rs. 100,000 at a simple interest rate of 10% per annum for five years. The simple interest calculation yields Rs. 50,000 in interest, resulting in a total repayment of Rs. 150,000. Unlike compound interest, simple interest remains constant throughout the loan term, resulting in a straightforward repayment structure. This example illustrates the simplicity of calculating and understanding simple interest on loans in India, making it easier for borrowers to plan their repayments accurately without the complexities of compounding.
2. Compound interest
Compound interest is a method of calculating interest on an initial principal amount, including interest accumulated from previous periods. As time progresses, the interest is added to the principal, leading to exponential growth. Compound interest is commonly used in long-term investments, savings accounts, and loans, maximising returns over time.
Compound interest formula
Here is the mathematical formula, on which a compound interest calculator works to compute loan amount:
A = P (1 + r/n) ^ nt
To calculate Interest Paid on a loan, the formula is
Interest = A – P.
- A = Total Amount Paid
- P = Principal Amount
- R = Rate of Interest
- N = number of times interest is compounded per year
- T = Number of years
Compound interest example
Let's say you borrow Rs. 100,000 at an annual interest rate of 10% with quarterly compounding. Over five years, the compound interest formula yields Rs. 61,051.02 in interest, resulting in a total repayment of Rs. 161,051.02. Compound interest in India, as elsewhere, amplifies the total repayment due to the effect of interest compounding periodically, demonstrating the significance of understanding compound interest in financial planning.
Difference between simple interest and compound interest
Aspect
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Simple interest
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Compound interest
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Calculation method
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Calculated solely on the principal amount invested or borrowed.
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Calculated on both the principal amount and the accumulated interest over time, resulting in interest on interest.
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Formula
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Simple Interest = Principal × Rate × Time
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Compound Interest = Principal × (1 + Rate)^Time - Principal
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Growth pattern
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Linear growth pattern; interest remains constant throughout the investment or loan period.
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Exponential growth pattern; interest accumulates over time, leading to a larger amount than simple interest for the same principal.
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Impact on returns
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Generally results in lower returns compared to compound interest, especially over longer periods.
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Typically leads to higher returns compared to simple interest, particularly over extended durations, due to compounding effects.
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Frequency of interest
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Interest is calculated only once at the end of the investment or loan period.
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Interest is calculated periodically, such as annually, semi-annually, quarterly, or monthly, and added to the principal for future calculations.
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Read more: Difference between simple interest and compound interest
Advantages of using a loan interest rate calculator
Using an interest calculator to compute EMIs offers quick, accurate results, helping you plan your finances better before you apply for personal loan. It allows you to compare loan options and choose the most affordable one. Interest calculator for loan is a helpful tool to understand the total cost of borrowing. Here are some benefits of utilising our interest calculator:
- Accuracy: Our interest calculator ensures precise calculations, offering accurate figures for interest and repayments, eliminating errors and providing reliable financial insights.
- Time efficiency: With swift result generation, borrowers save time, enabling them to make informed decisions promptly without delays in their financial planning or loan application processes.
- Financial planning: By providing accurate repayment estimates, our calculator assists borrowers in planning budgets effectively, ensuring they can manage their finances efficiently and meet their repayment obligations.
- Comparison tool: Borrowers can easily compare loan offers from different lenders using our calculator, facilitating informed decisions based on interest rates, repayment terms, and overall borrowing costs, optimizing their loan selection process.
- Cost-effectiveness: Our interest calculator and personal loan calculator helps borrowers minimise overall borrowing costs by allowing them to evaluate various loan options and choose the most cost-effective solution tailored to their financial needs and capabilities.
- Informed decisions: Empowering borrowers with comprehensive information, our calculator equips them to make informed decisions regarding loans, enabling them to choose the most suitable options aligned with their financial goals and circumstance. Interest amount calculators help in understanding the total cost of borrowing and enables in better decision-making.
Uncontrollable economic factors that affect interest rate
Several uncontrollable economic factors influence interest rates, impacting both borrowers and lenders:
- Inflation: Higher inflation rates often lead to higher interest rates as lenders need to compensate for the decreased purchasing power of money over time.
- Economic growth: Strong economic growth increases the demand for credit, leading to higher interest rates as borrowers compete for available funds.
- Central Bank policies: Central banks, like the Reserve Bank of India, set benchmark interest rates based on economic conditions. Changes in these rates directly impact lending rates across the economy.
- Global economic conditions: International economic stability and trends can affect domestic interest rates. For instance, economic turmoil in major economies can lead to increased interest rates due to higher perceived risks.
- Government borrowing: High levels of government borrowing can drive up interest rates as the government competes with the private sector for available funds, reducing the supply of credit for other borrowers.
- Exchange rates: Fluctuations in currency exchange rates can affect interest rates, especially in economies with significant foreign investment. A weaker currency might lead to higher interest rates to attract foreign capital.
These factors are beyond the control of individual borrowers but significantly influence the cost of borrowing.Ensure you use a basic interest calculator to understand the total cost of borrowing when you consider any type of loan.
Controllable factors that determine interest rate
Several controllable factors can influence the interest rate on loans, allowing borrowers to potentially secure better rates:
- Credit Score: A higher credit score indicates a borrower’s reliability, often leading to lower interest rates as lenders perceive less risk.
- Income Level: Steady and higher income levels can lead to more favorable interest rates since they demonstrate the borrower’s ability to repay the loan.
- Debt-to-Income Ratio: A lower debt-to-income ratio suggests better financial health, making lenders more likely to offer lower interest rates due to reduced risk when they lend money to borrowers.
- Loan Amount: The size of the loan can affect the interest rate. Larger loans might attract lower rates if they are perceived as less risky by the lender.
- Loan Tenure: Shorter loan tenures often come with lower interest rates since the risk of default decreases over a shorter repayment period.
- Collateral: Secured loans backed by collateral generally have lower interest rates because the lender has an asset to claim in case of default. Using a collateral for borrowed money can get better terms, however the process may take some time.
- Relationship with the Lender: Existing relationships with financial institutions, such as previous loans or accounts, can lead to better interest rate offers due to established trust and history.
By managing these factors, borrowers can improve their chances of obtaining more favourable interest rates.
How to receive better interest rates
To secure better interest rates on loans, consider the following strategies:
- Improve credit score: Maintain a high credit score by paying bills on time, reducing outstanding debt, and correcting any errors on your credit report.
- Increase income: Higher and stable income levels can make you a more attractive borrower, potentially leading to lower interest rates.
- Reduce debt-to-income ratio: Lower your debt relative to your income to improve your financial profile and qualify for better rates.
- Shorten loan tenure: Opt for shorter loan tenures to decrease the lender’s risk and secure lower interest rates.
- Build a relationship with lenders: Establishing a strong relationship with financial institutions through previous accounts or loans can lead to more favourable interest rate offers.
