Types Of Personal Loan Interest Rates

Every bank has a different method of functioning. There are different types of offers and benefits that they offer. They want to keep their customers happy. Hence, they choose to provide user-friendly services.

Interest rate is the rate at which interest is applicable on any amount borrowed from a bank or Non-Banking Financial Company (NBFC). Personal loan interest rates are the critical factors that determine the selection of a loan application. Thus, always compare interest rates from multiple lenders before settling on a loan offer.

There are two types of Interest rates applicable on a personal loan, these are:

• Fixed-Rate of Interest
• Floating Rate of Interest

1. a) Fixed interest rate: In this case, the rate of interest remains constant throughout the loan tenure. Consequently, the monthly EMI amount also remains fixed throughout the loan repayment period. It may help to plan long term monthly expenses.
   
2. b) Floating interest rate: It depends on either the limitation set by the lender or as current market conditions. As a result, the floating interest rate is liable to change periodically, which leads to an increase/decrease in loan tenure or monthly EMI pay-outs depending on whether the rates move upwards or downwards.

Interest Calculation Methods
A personal loan calculator, available on online banking apps, can be used to calculate interest in the following methods:

• Flat Rate method: The interest gets calculated on the total loan amount initially borrowed over the entire tenure of the loan.
  
• Reducing Balance method: As monthly EMIs are paid off, parts of the loan amount and the interest component are also reduced. Thus, the principal loan amount decreases. The interest is calculated on this decreasing loan amount and not the total amount initially borrowed.

Interest Rates for Different Applicants
Most lenders consider some factors when deciding the interest rate applicable to loan borrowers. The following are some points on personal loan interest rates differ depending upon the applicant type:

• Salaried and self-employed: Generally, salaried employees with a stable employment record employed with reputed organizations get the loan at a lower interest rate than independent professionals because they have greater job security and better repayment capacity towards the loan. Self-employed applicants who have stable sources of income can also take these loans from banks.

• Women: Certain banks and NBFCs provide a preferential rate of interest to women. It is to promote salaried women, entrepreneurs, and professionals to fulfil their dreams and be financially stable.

• Pensioners: Pensioners can get special personal loans at a relatively lower rate of interest from banks. Beyond the applicant type, the interest rate depends on the profile of the loan applicant. People with a stable income, decent credit history tend to receive a loan at a lower rate, irrespective of their category.

How do EMI calculators work?

Whenever people opt for loans, they pay it all at once or in instalments, also known as Equated Monthly Installments, as per their loan requirement and loan duration. It is vital to calculate the amount carefully and ensure there are no delays in the payment. Paying late EMIs is penalised, and nobody would want to risk it. However, EMIs make payment facilities organised and structured in a manner where the loan borrower can meet daily essentials without feeling financially helpless.

A simple definition of a personal loan EMI calculator is that it is a tool where loan borrowers enter the amount to borrow, the loan duration, the rate of interest and the processing fee. The calculator will calculate the estimate loan amount along with the amount required for the EMI monthly. Accordingly, the borrower will set a budget to create a balance between the income and the expense.

The device uses a simple formula to derive the loan amount: E = P x r x (1 + r) ^ n / ((1 + r) ^ n – 1).
Given below is the explanation of the formula:

E – It is the EMI amount that the borrower will pay every month
P – It is the amount that the individual will borrow
r – It is the rate of interest calculated monthly
n – It is the duration of the loan calculated in months
Given below are three reasons why loan calculation is essential:

1. Loan amount: It is advisable to borrow loans of amounts that one can pay quickly. People choose appropriate loan amounts depending on the loan EMI calculation so that repayment becomes less of a hassle. By maintaining a low ratio between debt and income, people can avoid defaulting on loan repayment.
   
2. Loan tenure: Shorter loan tenures mean higher EMI payments and lower interest rates. In contrast, longer loan tenures mean lower EMI payments and higher rates of interest. Calculate EMIs for different types of loans using a personal loan calculator designed especially for estimating EMI payments and suitable loan tenures.
   
3. Loan EMI: Loan borrowers with high debt-to-income ratios are at a higher chance of defaulting on the loan. Defaulting on secured loans, like car loans, force banks to repossess the vehicle and put it up for auction, to compensate the loan amount and other dues. Hence, loan amounts should not exceed more than 50 per cent of the borrower’s income.

Manual calculation of loan EMIs leads to human errors. With the advancement in technology, people can use an online personal loan calculator for free. Online banking apps have this feature to help others get accurate and instant results on any type of loan scheme.