Introduction of Interest rate calculator
An interest rate calculator determines the real rate of interest on loans with a fixed term and monthly payments. Interest rate is the amount charged by the lenders to borrowers for the use of money, expressed as a certain percentage of the principal or borrowed amount; it can also be described alternatively as the cost to borrow money. The interest rate directly affects total interest paid on any loan. Interest rates are involved in almost all lending and borrowing transactions. For examples, applications of the interest rates include mortgage rates, the charge on a person's outstanding debt on a credit card, business loans to fund capital projects, the growth of retirement funds, amortization of long-term assets, the discount offered by a supplier to a buyer for paying off an invoice earlier, and much, much more. It represents the time value of money. The interest rate is calculated as a percentage of the money borrowed and it is usually charged annually.
The interest rate may differ depending upon the eligibility criteria laid down by the lender. Based on the interest rates, loan amount and tenor of the loan, your EMI is calculated. EMI is Equated Monthly Installment. Usually, credit cards and personal loans have a high rate of interest because they are unsecured credits. Conversely, car and mortgage loans come at comparatively low-interest rates because they are secured by valuable collateral.
Various types of interest rates are offered by the lenders based on their policy. Some of the popular types of interest rates are:
- Fixed Interest
- Variable Interest
- Prime Interest
Manually calculating the rate of interest on the loan can be complex and difficult. Here, the interest rate calculator acts as the best friend. The best part is that the interest rate calculator is one of the most flexible around. It can solve for any of the missing loan variables including the number of payments, rate of interest, loan amount, or the monthly payment. It generally requires basic information like loan amount, tenure and EMI.
Features & benefits of Interest rate calculator
Since you can get a lot of information on various aspects of a loan with the help of an interest rate calculator, you can use it for comparison. The calculator can use for the comparison of various results based on the values chosen by you to get the best interest rate, EMIs, tenure, etc.
- Help in maintaining CIBIL Score
If you go to the lender for knowing about the interest rate, they will first enquire about your CIBIL and then tell you the same. And too many hard inquiries will have adverse accept on the credit score. But with the use of interest rate calculator, you can know the interest rate without comprising on CIBIL score.
- Interest rate calculator helps to plan finances well
An interest rate calculator plays a significant role in deciding the loan amount and the correct lending institution for borrowing the loan. When the user fills-in the calculator form, it displays the rate of interest; which helps in predicting and planning the finance for a longer period.
All the values in the interest rate calculator are customizable, you can alter the values till you get the desired and best result. Therefore, it will help you in availing the perfect loan amount for you with the best possible values.
What is the Loan Amount/Principal Amount?
The Loan amount/ Principal amount is the major component of a loan. When a borrower pays the EMI, they are paying a part of the due interest on the outstanding loan amount, while the remainder goes for the paying off the outstanding loan amount.
Therefore, the principal amount is the amount of money that a borrower has borrowed from the lender less whatever the borrower has already repaid. Whereas, the interest is the amount of money the lender charges on top of the principal amount, and is calculated based on the rate of interest and the amount of the principal.
What is EMI/Installment?
EMI stands for Equated Monthly Installment. It is a sum that a loan borrower is liable to pay every month in the subject to repay the loan. The EMI amount is calculated in such a way that the loan interest is higher during the initial months and gradually reduces with each payment. There are three major factors used in loan EMI calculation:
- Loan Tenure: The loan term or duration, is also commonly referred to as “repayment tenure” is the period for which a loan is sanctioned. The borrowers are supposed to pay the principal sum and the total interest within the sanctioned period.
- Principal amount: This is the base amount that is borrowed by the customer as a loan. It may differ from lender to lender based on their evaluation of the customer’s profile.
- Rate of Interest: The interest rate is the percentage levied on the principal amount. This may vary based on the lender to lender.
What is Loan tenures?
Loan tenure is the time chosen by the borrower for the repayment of the loan amount. Generally, the loan tenure varies based on the type of loan is availed. Almost every bank offers a flexible repayment loan tenure which implies that the borrower has the power to choose the repayment tenure which best suits his/her needs.
Q) How to use an Interest rate calculator?
Ans) An interest rate calculator is very easy and simple to use. All you need to do is enter the required information like the loan amount, loan repayment tenure (in months), and EMI. The calculator will use the information provided by you and show you the interest rate you will have to pay every month.
Q) What are the parameters on which interest rate is charged?
Ans) The parameters on which the interest rate charged may vary based on many things like the type of loan, lenders, and others. But the major factors that determine the interest rate are given here:
The income of an individual majorly affects loan interest rates. Generally, a high-salaried individual is at a safer bet while availing of a loan. As the chances of timely repaying the loan amount are higher in the case of high salaried people.
- The Repayment History
The repayment history plays a significant role in determining the loan rate of interest. Typically, it serves as a validation of the past financial records of loans and credit cards. When an individual makes a payment on the previous loan, additional points are added upon the current score.
The credibility of an organization ensures a good deal of loans. When an individual works for a reputed company, he/she is more considerate towards the timely EMI payments.
- Nature of Employment
An individual employment nature also determines the loan rate of interest. Generally, a great difference has been seen between the offered interest rates to a salaried employee and a self-employed entrepreneur.
- Customer Relationship
Another important factor that affects the loan interest rate is the relationship with the loan lender. If the borrower been an existing loyal customer with a good repayment record, the loan lender might grant some extra perks and offers.
Q) What is CIBIL and does it have any impact on the monthly EMI?
Ans) CIBIL is an acronym for the Credit Information Bureau (India) Limited. It is India’s first credit information bureau. It acts as a database of the credit history of an applicant. CIBIL provides this information to the lenders in the form of credit information reports (CIR). And yes, it majorly impacts the interest rate which ultimately affects the monthly EMI. If an applicant has a good CIBIL score then his chances of loan approval at a low rate of interest increase.
Q) How much loan can I borrow?
Ans) Generally, the loan amount depends on the income and varies based on whether you are salaried or self-employed. Usually, the lenders restrict the loan amount such that the EMI does not exceed the 40% - 50% of an applicant’s monthly income.
Q) What is the default interest rate for a loan?
Ans) The default rate is the interest rate per annum that applies to the overdue of payments.
Q) How long could my loan tenure be?
Ans) Loan tenure depends on the type of loan you avail for example if you go for a home loan that the tenure can go up to 30 years whereas if you go for a personal loan typically the maximum loan duration of 5 years.
Q) How can I get a loan at a low-interest rate?
Ans) There are different factors on which the rate of interest depends. And to get the loan at a low-interest rate you need to be a focus on few things like your credit score, repayment history, compare the interest rate before applying, look out for seasonal offers, employment history, the credibility of the employer, and others.