How Should You Use An Interest Rate Calculator For Personal Loans?

Whenever you take a loan, the financial institution adds a surplus to the repayable sum apart from the borrowed principal. This extra amount is the interest or cost you must bear for leveraging instant financing services. 

These days you can effortlessly predict your loan's cost in just a few taps. You only have to use an interest rate calculator for a personal loan. These financial tools are readily available on a creditor's website that clarifies the payable EMIs distributed throughout the tenure after you enter the desired loan amount, repayment tenure and interest rate.

How to Use Personal Loan Calculators from Scratch?

If you haven't used this tool before, then strictly avoid websites with overwhelming user interfaces. Instead, head to a platform that presents only the bare minimum fields making the EMI checking process easier for you.

After you have entered an appropriate webpage, consider following these steps to calculate the payable EMIs:

Step 1: Fill in the blank spot adjacent to the 'Loan amount' option. You may either manually enter the desired loan amount or provide this information using the given slider. 

Step 2: Carefully feed in the interest rate your preferred lending institution charges. 

Step 3: Provide the tenure details either in the form of a total number of years or months.

After you diligently follow each of these steps, the calculator reveals applicable EMIs spread throughout the amortisation period. However, you must understand that the figure on your device screen is approximate. It will help you execute monthly financial planning after prioritising your liabilities. 

Certain parameters like the loan processing fee, personal credit history, income, etc., are bound to affect the loan offers and, thereby, the EMI amounts. Speaking of which, before entering a loan amount, it is always suggested to verify with the authorised personnel whether you have the sufficient credit score needed for a personal loan. 

Moving ahead, every interest rate calculator for personal loans works based on a common formula, which is:

• EMI = P x R x (1+R)^N / [(1+R)^N-1]

You can put the respective values for each of them to determine the monthly payouts. But, to do that, first, you must realise what each letter signifies. Here, P means principal borrowed, while R and N stand for monthly interest rate and loan term, respectively. 

Let's learn with a practical example to sharpen our understanding. Suppose you are willing to borrow Rs 8 lakh personal loan from a bank at 10.5% interest. Also, you select the repayment tenure as 5 years or 60 months. 

In that case, your monthly payout will be:

• EMI = 8,00,000 * 0.008 * (1+0.008)60 / ((1+0.008)60-1) = Rs. 17,195

Consequently, the total cost or net payable interest for this loan offer will be Rs [(17,195 * 60) – 8,00,000] = Rs 2,31,700. 

Note: Here, the value 0.008 refers to monthly interest. It must be implemented in the formula instead of '10.5' – the annual interest fixed by the lender. You must first determine this monthly interest as a fraction by calculating: Annual interest / 12 / 100.

What factors do lenders consider while determining the rate of interest?

Several factors come into play when a lender analyses your loan request before approving it. Here we have listed some of them:

• Credit score

You will find that the minimum credit score needed to avail of a personal loan keeps on varying from one institution to another. All details regarding this can be procured from the concerned lender's official website.

• Requested loan tenure

Generally, lenders levy a greater interest when someone appeals for a prolonged repayment period. The reason is a longer repayment period entails greater credit risk.

• Principal

The total loan amount has a significant role to play when it comes to determining the final interest rate. A higher loan amount will attract a higher interest rate and vice versa. 

Conclusion

A personal loan interest rate calculator is undoubtedly helpful, especially before applying for a substantial loan amount. These modern tools are easily accessible with no extra costs and help determine a favourable financing partner. Where earlier you had to collaborate with different agents to select the optimal tenure or to select a comfortable interest rate, now everything is possible in just a matter of seconds, easing the borrowing experience.