Personal loans are unsecured loans that can be used for multiple purposes. A personal loan may have a bit higher interest rates than secured loans, as you don’t need to give any collateral against your loan. When applying for a personal loan, it’s best to do your research so that your EMIs are manageable. Several financial institutions provide personal loans with varied interest rates based on factors like income, employment status, and credit history.
If you are applying for a personal loan, you should know everything about one of the most crucial elements: interest rates and the personal loan interest calculator. To know these elements properly, take a look at the next section of this post.
What is Personal Loan?
A personal loan is an unsecured loan in which you can borrow money without putting up any security. These loans have low-interest rates, few document requirements, and are authorized rapidly. You may use these funds to meet your financial needs, such as purchasing a car, renovating your home, and funding your school, holidays, weddings, and medical costs. In personal loans, credit is granted based on a person’s work history, repayment capacity, income level, profession, and credit report.
What is the Interest Rate on a Personal Loan and What are the Factors Affecting it?
Many financial organizations provide their clients with the best personal loans, and you can apply for one online or in person. Before applying for a personal loan, you should investigate the interest rates available. The interest rate is affected by several variables, including:
- Income: Since a personal loan is unsecured, financial institutions will base their decision on your existing income. The greater your income, the more likely you are to get approved for a loan with a reasonable interest rate.
- Company’s status: Lenders categorise firms into several groups, and these classifications influence your company’s position. If your firm fits into a higher category, you can easily acquire a low-rate personal loan.
- Relations with the lending institution: The nature of your relationship with your bank is also significant in receiving the highest interest rate on a personal loan. To secure a personal loan, banks often provide special interest rate plans to their loyal clients, particularly those who have credit cards or bank accounts.
- Credit and payment history: If you have applied for a personal loan and your payment history is weak, it can be unfavourable for your loan application. Many lenders will not evaluate your profile if you have a bad credit history. In simple terms, the higher your CIBIL score, the better it is for your loan application approval.
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What is a Personal Loan Interest Calculator?
You are now aware that the interest rate on personal loans varies from person to person based on a variety of criteria. These interest rates may be computed using two distinct personal loan interest calculator: the flat interest rate approach and the diminishing balance method. Let’s have a good understanding of both of these aspects.
1. Fixed or flat interest rate technique
A flat or fixed interest rate denotes a fixed amount of interest due. Since interest is computed on the loan amount throughout the period, interest remains constant and does not decrease as the principal amount reduces with your monthly EMI. You may use the following calculation to compute your interest amount using this method:
EMI = (principal amount + total interest payable)/ Total tenure of the loan in months
2. Reducing or Decreasing Balance Method
The interest rate is calculated on the outstanding loan amount using the reducing/decreasing balance technique. In this technique, the EMI consists of the principal amount plus the interest owed on the outstanding loan amount. It proposes that the interest rate on the remaining debt be changed each time you make an EMI payment. As a consequence, your principal and interest amounts decrease with each payment.
The following formula may be used to calculate the EMI:
Total interest payable on loan = outstanding amount of loan x interest rate
We hope this post provided you with all of the information you needed about personal loans and the personal loan interest calculator. A personal loan is by far the best way to satisfy your financial demands, and you can quickly apply for one if you understand its key components.
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