Cumulative interest – Know its meaning, formula and example

Cumulative interest is an important financial concept that refers to the total interest accumulated over time on a loan or an investment. Whether you are borrowing money or investing your savings, understanding cumulative interest helps you evaluate the long-term cost of borrowing or the overall return on your investment. It highlights how interest builds gradually over a period and why tenure plays a significant role in financial planning.

For borrowers, cumulative interest shows how much extra is paid over and above the principal amount. For investors, it reflects how interest earnings add up over time. Having clarity on this concept allows individuals to plan repayments better, compare financial products accurately, and avoid unexpected financial strain. If you are considering borrowing, you can also check your pre-approved loan offer to understand your options before making a decision.

Cumulative interest refers to the total interest earned on an investment or paid on a loan over a specific period. In investments, it represents the interest accumulated on the principal amount, contributing to the overall growth of the investment value. In loans, cumulative interest reflects the total interest paid by the borrower throughout the loan tenure.

For example, in the case of a personal loan, interest is calculated on the borrowed amount and added over time as repayments are made. The longer the loan tenure, the higher the cumulative interest paid. Understanding this helps borrowers assess the real cost of a loan beyond the headline interest rate. Being aware of cumulative interest makes it easier to compare loan options and choose a repayment structure that aligns with your financial goals.

The way cumulative interest is calculated on a personal loan depends on the interest calculation method used by the lender. The two most common methods are the reducing balance method and the flat interest rate method.

Under the reducing balance method, interest is calculated on the outstanding loan balance after each repayment. As the principal reduces over time, the interest component also decreases, resulting in lower cumulative interest. This method is widely used and is generally more cost-effective for borrowers.

In contrast, the flat interest rate method calculates interest on the entire principal amount for the full loan tenure, regardless of repayments made. This leads to a higher cumulative interest payout over time.

Before taking a loan, it is important to understand which method is being applied. Reviewing the loan agreement carefully and clarifying interest calculations can help you avoid surprises later. You may also want to check your eligibility for personal loan to ensure the loan terms suit your financial profile.

Evaluating cumulative interest through an example can help you understand the total cost of borrowing more clearly. However, keep in mind that this example does not include additional charges such as processing fees or penalties, which may apply depending on the lender.

Suppose you take a personal loan of Rs. 50,000 at a flat interest rate of 12% per annum for a tenure of three years.

The formula used to calculate total interest is:

Total interest = P × r × t

Where:
P = Principal amount (Rs. 50,000)
r = Annual interest rate (0.12)
t = Loan tenure in years (3)

Total interest = 50,000 × 0.12 × 3 = Rs. 18,000

This means you would repay Rs. 18,000 as interest in addition to the principal amount of Rs. 50,000. The total repayment over three years would therefore be Rs. 68,000. To understand how interest is split across monthly instalments, you can use a personal loan EMI calculator, which provides a clear breakup of principal and interest.

Understanding the difference between cumulative interest and compound interest is essential for making informed financial decisions, especially when comparing loans or investment products.

Cumulative interest:

• Total interest accrued on the original principal.
• Calculated using simple interest.
• Does not consider interest compounding over time.
• Common in basic interest calculations.
• Amount paid remains constant throughout the period.

Compound interest:

• Interest calculated on the initial principal and accumulated interest.
• Involves regular compounding periods.
• The total amount subject to interest increases over time.
• Common in loans, investments, and savings accounts.
• Typically, compound interest results in higher overall interest payments. To calculate compound interest using a compound interest calculator, input the principal amount, interest rate, compounding frequency, and the time period.
• Reflects the effect of compounding on the total owed or earned.

In summary, cumulative interest plays a vital role in understanding the true financial impact of borrowing or investing. By knowing how interest accumulates and how different calculation methods affect repayments, you can make better financial choices. This awareness supports smarter budgeting, effective loan planning, and long-term financial stability.