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If you wish to seek a loan from a financial institution to meet your requirement of funds, you are apprised of the interest rate payable for the tenure. Basis the rate charged, you make your budgetary plans. 

But you might be unsure of what methods do the financial institutions use to determine the interest rate on loan. The best possible way to know the interest rate on a loan is by using Interest Rate Calculator.

We at Afinoz, provide you with the most efficient Interest Rate Calculator which lets you do the calculations in less than a minute’s time or so. 

The Interest Rate Calculator is a very essential financial tool that will help you figure out any missing loan variable, interest rate, loan amount, or monthly repayment. Whether you are seeking Personal loan or Business Loan, this tool will assist you in figuring out the aspects of it. 

For borrowers seeking Business Loan, can determine interest rate by using the below calculator.

All you need to do is key in three or four variables, and there you find your result for the missing variable. While you’re at it, you can keep it for a handy reference by creating a printable amortization schedule.

How an interest rate calculator will be of help to you:

Apart from giving you accuracy in calculations, it also 

1. Lets you stay abreast of your outstanding abilities.
2. Lets you check your repayment dues, which can impact your credit score.
3. Lets you decide which EMI to pay later and which should be the priority if you have multiple loans running.
4. Saves from the trouble of manual calculations thus letting you stay updated on your finances.

Before we explore various components of the Interest Rate Calculator, let us first know about Interest Rate and the formulae used to calculate it.

What is an Interest Rate?

The money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt is known as Interest. In simpler terms, the price of the money lent is the Interest. A lender charges a proportion of loan as an interest to the borrower, which is typically expressed as an annual percentage of the loan outstanding.  

Formula to determine Interest Rate

The formula to determine the interest rate and total amount repayable in EMIs is : E = P * r * (1+r)^n / ((1+r)^n-1)

Where the following are represented as :

E - EMI Repayable

P- Principal Loan Amount

R/r - Rate of Interest Applicable

N/n - Tenure in Years

Over a period of time, you’ll notice that your monthly interest cost decreases, eventually decreasing the amount that goes towards the loan. Usually, personal loans are offered at fixed interest rates to borrowers, that does not change throughout the tenure.

In a fixed interest rate pattern, a borrower repays loans at a fixed percentage in equal instalments over the entire tenure of the loan. It is ideal for planning long term budgeting, which is not influenced by market conditions. 

There is a Variable interest rate too that fluctuates over time. The fluctuations basically depend on factors such as inflation or Market Index. The floating interest rate loan is tied to a marginal cost of fund-based lending rate. The main benefit of the floating rate is they are available at a slightly cheaper rate. 

Factors affecting Interest Rates

There are various factors affecting interest rates that borrowers get on their loans. Majorly these can’t be controlled but having an understanding of them may be helpful.

Unemployment Rate - When the employment rate is too low, the inflation rate rises and businesses are done at a high cost. Within an economy, conversely when employment is low, there is a lot of consumer activity, interest rates go up.

Supply and demand -The simple demand and supply affect the interest rate on loans. When the need for money or credit increases in the market, lenders raise the rates. And when the demand for credit decreases, rates are lowered to attract more borrowers. 

Economic activity - When the interest rates are slashed, it is more likely that people borrow money for meeting their requirements of expanding businesses or making high ticket purchases of property or car. It will create more purchasing power for people and boost the economy. Basis these central banks use interest rates as one of the prime tools to control the economy. Usually, the central bank lowers interest rate when the economy is going slow and increases when it is expanding at a faster rate.

Economic Policy and Inflation - Monetary policies designed by the central government majorly affect the interest rates in a country’s economy. Inflation is the prime reason affecting interest rates. The general increase in the price of goods and services indicates the fall of the purchasing power of citizens. It is closely related to interest rates on a macroeconomic level and large scale changes in either will have an effect on the other. 

Controllable factors that determine the Interest Rate

An individual’s credit score plays a major factor in determining interest rates. Healthier the credit score, the higher is the chances of getting a better deal for the interest rate. 

The amount of money borrowed also has an impact on the interest rates of the loan. It is a simple equation of demand and supply were more the demand, higher will be the rates. When not many people are in need of loan and there is plenty of money to lend, the interest rates are slashed. 

While a good credit score definitely works in favour of the borrower in getting a better deal on interest rates. There are other elements that can be taken note of in receiving better interest rates from lenders. Those are discussed below

Refrain from applying for Credit too often: Frequent inquiry on credit indicates a borrower is finding difficulty in getting credit. To the lender, it indicates a high-risk borrower.

Grab the offer when the opportunity is favourable: A slowdown in economy can be a favourable time for borrowers to avail of the loan. When there are fewer borrowers seeking a loan, the interest rates are lowered. One can take advantage of such a situation and avail loans at reduced interest rates.

Secured Loans: Lenders are comfortable to offer loans with security. Loans without security attract a higher rate of interest. Borrowers can pledge collateral to avail loans at lower interest rates.

Thorough Research is important: The parameter of assessing risk differs from lender to lender. It is important to shop around and look for the ones, then going by the first loan offered. You can negotiate it with lenders stating offers and benefits by other lenders. At the same time also be specific about the terms and conditions and any additional charges.

Repayment Tenure:  Putting a lower amount as a down payment and choosing a longer loan tenure may result in an increased rate of interest, as it puts lenders at risk. Going for a shorter tenure with a higher down payment may help lenders in offering a lower interest rate. 

Fixed Vs Variable Interest Rates

Fixed interest rates refer to lending rates which are set as a certain percentage for the life of the loan and will remain unchanged. Variable rates are the rates which fluctuate over time. The variation depends on factors such as repo rate, inflation, or a market index. Both have different pros and cons, but the Interest Rate Calculator will only provide the result as a fixed interest rate.

So, an Interest Rate Calculator is useful to figure out all the conditions surrounding the loan before one finally seals the deal. Interest rates are the most important factors to consider when you apply for a  loan. It is one of the four elements which the Calculator lets one figure out.

The Interest rate calculator assists in determining any unknown variable, thereby giving the borrower more detailed information to make the best decision for the situation.