The following are two important methods for calculating personal loan interest:
- Flat Rate System: In this method, interest is measured on the entire loan sum lent at the outset, without taking into account the fact that monthly EMIs are gradually reducing the principal. As a consequence, when this form of interest calculation is used, the overall interest payout is higher.
- Reducing Balance Process: Interest is based on the remaining loan amount only, not the total loan amount originally lent. It's important to remember that an EMI contains both interest and principal components. As a result, the remaining principal decreases with each EMI bill, resulting in a slightly lower interest payout when this form of interest calculation is used.
The “Reducing Balance” method of interest calculation is used by Indian Bank, which means that interest is calculated only on the outstanding loan amount.