How is the Home Loan interest rate calculated for a bank loan?
Whenever a loan is taken from a bank, the principal amount, along with a certain percentage as interest, needs to be paid. The payment of the total amount is distributed throughout the loan tenure. The home loan interest rate to be paid is an important factor to consider as it significantly increases the total amount payable to the lender.
What is the Home Loan interest rate?
Loans are repaid in two parts— the principal amount and the interest. Interest, which is an important part of the total amount to be paid, is levied as a charge by the bank. It is paid at intervals as a certain percentage of the amount of loan remaining to be paid.
When you apply for a bank loan, it is important that you calculate the interest amount you will need to pay every month according to the bank’s policy. If you do not know how to calculate the interest rate for a bank loan, this article is for you. Please read on!
What is Interest Rate?
The home loan Interest rate, denoted as the Annual Percentage Rate, is the amount payable to the lender annually on the outstanding principal amount.
How To Calculate Interest Rate On Bank Loan?
The amount of interest payable on your bank loan is calculated as follows:
EMI = [P x (R/100) x {1+(R/100)}^N]/[{1+(R/100)}^(N-1)]
where,
EMI = equated monthly installments
R = monthly home loan interest rate = interest rate/12 calculated annually
P = the principal amount borrowed
N = tenure of the loan in months
Suppose an amount of Rs. 5 lakhs is borrowed from a bank at a home loan interest rate of 12% for a tenure of five years. The interest payable in the first month will be calculated as: (5, 00,000*0.12/12)=5,000
The total equated monthly installments payable is the sum of the principal amount and the interest. The total EMI calculated using the formula discussed below comes out to be Rs. 11,122.
Formula: IPMT(rate, per, nper, PV, [fv],[type]),
where the rate is the home loan interest rate decided by the bank
per is the month or installment for which the interest is being calculated,
nper is the overall tenure for repayment of the loan,
[type] denotes whether the payment has to be made at the beginning or end of the month. It can be either 0 or 1,
[fv] refers to the desired amount left at the end of the tenure. It is an optional field and typically set as 0. Check the table below for reference:
| Month | Loan | EMI | Interest | Principal |
| 1 | 500,000 | 11,122 | 5,000 | 6,122 |
The interest payable for every subsequent month is calculated on the outstanding principal amount or the new loan balance, which is calculated as follows:
Total loan amount – Principal already paid
What are the factors on which the rate of interest depends?
The home loan interest rate is regulated by the Central Bank. However, certain other factors influence the ongoing interest rates. Those are as follows:
- CIBIL score: Your credit score indicates your credit worthiness. Better negotiations can be made with the lender if you need a bigger amount and your credit score is high. The CIBIL score required for availing of different types of loans depends on the internal policies of the bank.
- Loan tenure: Loan tenure is a very important factor in determining the interest rate. The shorter the tenure, the lesser the amount of interest to be paid.
- Type of loan: The rate of interest applicable varies based on the type of loan availed. Different rates of interest apply to secured or unsecured loans.
Conclusion
Before applying for the best home loan, the borrower must clearly understand the terms and conditions and the interest payable. This will help shortlist the bank best suited to the borrower’s needs and capacity. A loan has a deep impact on your finances. Therefore, you must invest adequate time researching the offers provided by different banks.
