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A personal loan is an unsecured loan which can be taken without collateral. With proper documents and a good credit score, it is quite easy to apply for one. Repayment of a personal loan, like any other loan is made in two parts – the principal and the interest.The interest is charged on the loan amount which is a separate component and is over and above the principal loan amount. Let’s look at how the interest rate is calculated on a personal loan.
What is an interest rate?
An interest rate is a percentage charged by the lender as an annual percentage of the loan outstanding. Interest is paid on a monthly basis by the borrower. It is calculated based on the credit history, credit score, loan amount and monthly income of the borrower. For a personal loan, the interest rate can fall anywhere between 10-20% normally.
How is interest calculated?
The basic formula that is the basis for an interest calculation is – Interest = Principal x Interest Rate Let’s look at an example!Roshan takes a personal loan of INR 2 lakhs at an interest rate of 15% per annum to be paid back in 60 months or 5 years.Monthly Interest = 200000 x 0.15/12 = INR 2500Principal to be paid each month = INR 8333.33Total EMI = Principal + InterestIn this case, Roshan will have to pay the first month’s EMI of INR 10833.33Now, for the second month, the interest will be calculated on the new balance which is (200000-8333.33) 191666.67.Similarly, each month the interest is calculated on the new outstanding balance which is calculated by subtracting the monthly principal from the total loan amount.
How is total interest calculated?
By adding up the interest paid over the entire year, you can arrive at the total interest for 12 months. By determining the interest amount each month, you can create your own monthly EMI calculator to keep track of your repayment.Interest rates on a personal loan are usually higher when compared to a housing loan or an education loan as it does not involve any collateral. Since there are no collaterals required, the documentation is also very minimal in nature.In this digital age, with the advent of paperless loans, the requirement of going through an elaborate application process has been eliminated and replaced with a quick form submission online followed by uploading scanned copies of your documents. It usually takes 1-7 days for your loan to get approved depending on your profile. In some cases, the time period may be longer. In all, personal loans are a very easy, convenient and hassle-free option for immediate funding.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
FAQS - FREQUENTLY ASKED QUESTIONS
How to get a personal loan from the bank ?
You can easily apply for a personal loan. Applying for a personal loan is really easy. You first need to decide what reason you need a personal loan and the amount you require. Then you need to check if you are actually eligible for a personal loan. You can check the same on various Personal Loan Eligibility CalculatorsV Online. Once you know you are eligible, you can apply for a personal loan by visiting the bank personally or on its website online. By submitting some required documents like your ID Proof, Address Proof, and Income Proof Documents, you can quickly get a Personal Loan.
How to get a good interest rate on a personal loan ?
Getting a personal loan at the best rate possible is necessary as your interest amount gets decided on the interest rate of your personal loan. You can get a good interest rate on a personal loan by following these hacks.
Maintaining a good credit score by paying your dues on time and by having a good history of repayment of your previous or existing loans.
Compare interest rates on personal loans between various lenders. Choose a lender with competitive interest rates.
Have a good employment history. Having a reputed employer also helps in getting personal loans at low interest rates.
What is the lowest interest rate available on personal loans ?
The interest rates on Personal Loans usually range from 11% p.a. to as high as 36% p.a. But if an individual has an excellent credit score with a good history of loan repayment, they can even bargain for interest rates as low as 9% p.a.
What is the RBI rate of interest for personal loans ?
The Reserve Bank of India (RBI) doesn’t set a fixed rate of interest for personal loans. It allows the lenders to decide the rate they want to lend at. However, interest rates below and above the acceptable range defined by a variable over and above the base rate are not allowed by the RBI. RBI releases these base rates from time to time which can be checked on its website.
What is the RBI rate of interest for personal loans ?
A lender needs certain documents that can prove that you have a regular income source that can service the personal loan. Even if you don’t have a salary slip and/or are self-employed, you can still get a personal loan. In absence of a salary slip you can provide ITR and Bank Statement as proof of your income. Another way to easily get a personal loan without a salary slip is to get a secured loan by providing collateral against the loan.
How to apply for a personal loan without visiting a branch ?
There are various lenders including banks that provide personal loans to borrowers with just a few clicks. The complete process of the personal loan can be completed online without visiting a branch and the loan amount also gets approved in a matter of a few hours. One can avail of this service if the loan amount to be borrowed is not unusually high.
Is a guarantor required for personal loans ?
Lenders don’t usually ask for a guarantor for a personal loan if the borrower meets all the requirements laid out by the lender. But in cases where the borrower is not able to prove their creditworthiness (usually when the Credit Score of the borrower is low); the lender can ask the borrower to provide a guarantor against the personal loan. This way the borrower gets the loan that they require, and the lender gets the safety against the loan provided by them.
What factors affect the personal loan process ?
The borrower’s earnings i.e., income is taken into consideration while making decisions about the interest rate. Higher the income lower is the risk of bearing a high interest rate. Age is also considered important as individuals who are certain to retire sooner will be charged with a higher rate. Apart from these the nature of employment, bond with the loan provider etc also affect affects the process.
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