Know how to calculate monthly interest rates online
When looking for a personal loan, people will often find that most financial institutions display their interest rates as an annualized percentage. However, it is much easier to figure out the expenses for repaying a loan in terms of monthly interest rates. This is because your salary and expenses like electricity bills, costs of groceries, etc., are better expressed on a per month basis.
Knowing how to calculate the monthly rates will help you compare various personal loans offered by different financial providers and choose the best one. It will also help you figure the exact amount of loan you can take with your current income.
How to calculate the monthly interest rate?
You can calculate the monthly personal loan rates by knowing the annual percentage rate (APR). This refers to the interest rate for a loan for one year. If the APR is 12% and the loan amount is Rs. 2 lakh, the monthly interest rate is calculated in the following steps:
Step 1: First, convert the APR to a decimal by dividing it by zero. Thus, 12/100 = 0.12
Step 2: Now, divide this decimal by 12 to get the monthly interest rate. 0.12/12 = 0.01
Step 3: After this, multiply the number by the total amount (Rs. 2,00,000) to get the monthly interest, i.e. 0.01 x 2,00,000 = Rs. 2000.
Step 4: Next, convert the monthly rate back to a percentage by multiplying it by 100. 0.01 x 100 = 1%
Therefore, your monthly interest rate is 1%.
Similarly, you can calculate the daily, weekly, and quarter interest rates applicable on a personal loan. For the daily rate, divide the APR by 360, while for the quarter rate, divide it by four, and for the weekly rate, divide it by 52.
Types of interest rates on personal loans
Personal loans come with two types of interest rates. These are:
- Fixed interest rates: In this, the rate of interest remains fixed throughout the entire tenor. Thus, the EMIs also remain fixed throughout the tenor, which helps borrowers plan their spending, making it easier to repay the loan.
Most financial institutions in India offer personal loans at a fixed interest rate. As such, changes in Repo rates or other benchmark rates do not affect its EMIs.
- Floating interest rates: With floating interest rates, the interest will vary depending on the prevailing market conditions. These loans get linked to the internal benchmark of a financial institution, and thus, any change in repo rates changes the EMIs or tenor.
Factors affecting interest rate of personal loans
The following are some of the factors that affect the interest rate of a personal loan:
- Age: Younger applicants are deemed less risky and more likely to repay their loans than applicants nearing retirement age.
- Income: Your monthly income decides both the interest rates and how much personal loan amount you can get. Having a stable income also helps you get better rates.
- Nature of occupation: Personal loan for salaried applicants often offer lower interest rates than self-employed applicants. This is because they are considered to be more dependable from the lender’s perspective.
- Credit score: Most financial institutions demand a credit score of at least 750 for you to get a personal loan. You can take steps like paying your dues and reducing credits to improve your personal credit score.
How can one get lower interest rates for personal loans?
Follow the given tips to get a lower monthly interest rate for a personal loan:
Step 1: Try to pay your credit card bills and loan EMIs in full every month.
Step 2: Improve your credit score by checking it regularly, maintain the credit utilization ratio and avoid making multiple loan applications. Get a credit score of above 750 to get the lowest interest rate on a personal loan.
Step 3: Check the current offers and interest rates offered by financial institutions regularly.
Step 4: Avoid rejection of your loan application by applying for a loan within the eligibility criteria.
Step 5: Financial institutions prefer employees of reputed multinational companies and PSUs for personal loans.
Step 6: Financial institutions like Bajaj Finserv provide pre-approved offers for personal loans, business loans, and likes. These offer further streamline your loan application process. You can check your pre-approved offer by entering your contact information for hassle-free loan approval.
Personal loans offer an easy way out of financial distress. However, to avoid the financial burden, make sure to check the monthly interest rates applicable on a personal loan and apply for one that you can easily repay.