How to calculate interest rates on a loan? - Car loan, EMI calculator

Do interest rates confuse you? Need help with that car EMI calculation? Here is an article to break down the complex and drastic looking interest and EMI calculator formulas to let you know how to calculate interest rates on a loan and much more. 

Interest is simply the proportion of money charged by the lender additional to principal sum. It is also called the cost of the loan.These interest rates depend on the lender, loan tenure, cibil score, etc. 

For example - If a lender lends you an amount of 1000 rupees as a loan with 20% interest rate for a year, then, the interest is 20% of 1000 rupees, i.e., 200 rupees.

Principal	The actual amount of money borrowed.
Interest rate	The ratio of interest amount to the principal sum annually.
Time	It refers to the tenure of the loan.
Amount	It is the total repayment amount, i.e., sum of principal and interest of the loan.

How to calculate the interest rate of your loan? 

There are mainly two types of interests imposed on the loans, simple interest and compound interest. 

Simple interest is interest to be paid upon principal sum only whereas, compound interest is computed on principal plus interest. Nealy, all banks offer loans based on compound interests.

Only loans to bank employees or education loans in some cases, are based on simple interests. 

The formula for calculation of simple interest on a loan is the following:

I = PRT

A = P + I

where P: Principal 

           I : Simple Interest

          T : Time period

          R : Rate of interest 

          A : Amount 

Let us explain this with an example

If P = 100, R =10% and T = 2 years, then, 

I = 100.10. 2 /100 = 20 rupees

A = 100 + 20 = 120 rupees

(Note: Rate of interest is in percent form so divide whole value by 100)

Compound interest is the interest to be paid not only on the principal amount but on the accumulated interests over a period of time. It increases compoundly with changing principal amounts. 

The formula for calculating the interest is

    

           I =  P {(1 + R/100)T – 1}

A = P (1 + R/N) NT

R = (1+ (I/N))N - 1

 where, P is the principal amount, 

            R is rate of interest, and

            T is time period

            N is no. of times interest is applied upon.

Steps to calculate compound interest and total amount

Step 1 : Tabulate values of P, R, N and T. 

Step 2 : Use the compound interest formula stated above. 

Step 3 : Calculate final interest and principal sum to find the total amount to be repaid. 

How to calculate monthly payments (EMI) of a loan? 

If you are considering borrowing a credit card loan, buying an online item, car or any other loan, a portion of money is to be paid monthly as a repayment form. These are known as Equated Monthly Installments. 

The components required in order to calculate EMI or equated monthly installments are loan value( principal), tenure (years) and rate of interest. 

The prior EMI calculation lets you know the exact amount you have to pay every month keeping your personal expenses and budget in mind. 

EMI calculation formula:

EMI = P. R. ( 1 + R)^T / ((1 + R)^T - 1)

Car loan interest - Explained

Car loans are “amortized” or “spread out” which means the borrower is required to pay scheduled, monthly/periodic installments to pay off the debt through regular principal and interest payments to reduce the current balance of the loan. 

This is the car loan interest calculator formula. 

I = (R/ N) * P

where, R is interest rates

                         N is no. of payments, and

                  P is principal amount

Knowing how to find interest rates and deliberately solving them before making any financial decision is very important. There are a number of apps and online websites with built-in calculators available for this purpose too. Knowledge of such small formulas could save you from big frauds in future.