Bajaj Finserv Explains How to Calculate Interest on Personal Loan EMIs

BusinessWire India

Mumbai (Maharashtra) [India], September 22: When you borrow money, one of the most important things to understand is how to calculate interest on your personal loan EMIs. Knowing this not only helps you plan your monthly budget better but also ensures you don't end up paying more than expected. The calculation may look complicated at first glance, but with the right approach, it's easier than you think.

Why interest calculation matters

Every EMI you pay is made up of two parts - the principal (the amount borrowed) and the interest (the lender's charge for providing the loan). By learning how to calculate interest, you can see exactly how much of your payment goes towards reducing the loan amount and how much is charged as the cost of borrowing. This gives you more control over your finances and helps you make smarter repayment decisions.

The formula behind EMI

The standard formula used by lenders to calculate EMI is:

EMI = [P x R x (1+R)^N] / [(1+R)^N - 1]

Where:

-P = Principal loan amount

-R = Monthly interest rate (annual rate divided by 12 and then by 100)

-N = Number of monthly instalments

This formula may look complex, but it's the foundation of understanding how to calculate interest on your EMIs.

Breaking it down with an example

Let's say you take a personal loan of Rs. 2,00,000 at an annual interest rate of 12% for 24 months.

-Principal (P) = Rs. 2,00,000

-Annual Interest Rate = 12% → Monthly Interest Rate (R) = 1%

-Tenure (N) = 24 months

Using the formula, you can work out your EMI and then separate the interest portion from the principal. In the initial months, a larger share of your EMI goes towards interest, while later instalments focus more on reducing the principal.

Using tools for easier calculations

If formulas aren't your thing, you don't need to worry. Online tools make the process simple. A compound calculator or an EMI calculator can instantly show you the breakup of principal and interest for each month. All you need to do is enter your loan amount, tenure, and interest rate, and the tool will do the maths in seconds.

How prepayments affect interest

Another reason to understand how to calculate interest is to see how prepayments can benefit you. For example, if you pay off a lump sum midway through your loan, your outstanding principal reduces. As a result, the total interest you pay over the loan's life also decreases. By calculating interest before and after prepayment, you can measure your savings.

Planning smarter with knowledge

Knowing the interest component in your EMI helps you:

-Compare loan offers more effectively.

-Decide the right tenure for comfortable repayment.

-Understand how much extra cost you are paying for convenience.

-Explore options like prepayment to save money.

Even a simple calculation can highlight the true cost of your loan and guide you towards better financial planning.

Learning how to calculate interest on personal loan EMIs is a vital step in becoming a smarter borrower. Whether you use the EMI formula, rely on online tools, or experiment with a compound calculator, the goal is to understand where your money goes each month. With this knowledge, you can manage repayments with confidence, make informed choices, and reduce the overall cost of your borrowing.

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