How do banks calculate interest on a loan in India?+
Indian banks (regulated by RBI) are required to use the reducing balance method for all loan EMI products. Under this method, interest is charged only on the outstanding principal after each payment, so your effective interest cost decreases over time as you repay. Some informal lenders and older hire-purchase products quote flat rates, which are significantly more expensive - a 10% flat rate is equivalent to roughly 18–19% on a reducing balance basis.
How is EMI calculated on a loan?+
EMI = P × r × (1+r)^n / ((1+r)^n − 1), where P = principal, r = monthly interest rate (annual rate ÷ 12), n = tenure in months. This is the standard reducing balance formula used by banks. Use the EMI Calculator for full amortization schedules.
What is the total cost of a loan?+
Total cost = (Monthly EMI × Total months) + Processing fee + Prepayment penalties + Insurance (if any). Many borrowers only focus on the EMI amount, ignoring total interest paid. The total interest on a 20-year home loan can equal or exceed the original principal.
How does prepayment reduce loan cost?+
Prepayment reduces the outstanding principal, directly reducing future interest. Since interest accrues on the outstanding balance, early prepayments have the most impact. Many banks allow annual prepayment up to 25% of outstanding principal without penalty.
What is a good interest rate for a personal loan in India?+
Personal loan rates in India typically range from 10.5% to 24% per annum, depending on your credit score, income, and lender. Banks (SBI, HDFC, ICICI) offer rates from 10.5–18%. NBFCs and fintech lenders may go up to 30%+. A credit score above 750 gets significantly better rates.
How much total interest do I pay on a 20 lakh loan at 9% for 15 years?+
On a 20L home loan at 9% per annum for 15 years (180 months), the EMI is approximately 20,285. Total amount paid = 20,285 x 180 = 36.51L. Total interest paid = 36.51L - 20L = 16.51L. This means you pay 82.5% of the original loan amount as interest. Reducing the tenure to 10 years raises EMI to 25,350 but cuts total interest to 10.4L - saving 6.1L.
What does APR mean and how is it different from the interest rate?+
APR (Annual Percentage Rate) is the true annual cost of a loan, including the interest rate plus fees like processing charges, insurance, and other costs expressed as a yearly percentage. The nominal interest rate only reflects the cost of borrowing the principal. RBI requires Indian banks to disclose the Annualised Percentage Rate so borrowers can compare loans accurately. A loan with a lower interest rate but high processing fees may have a higher APR than a loan with a slightly higher rate and no fees.
How does a prepayment affect total loan interest paid?+
A prepayment directly reduces outstanding principal, which shrinks the interest charged in all subsequent periods. For example, prepaying Rs 1 lakh on a 20L home loan at 9% with 10 years remaining saves approximately Rs 52,000 in total interest and shortens the tenure by about 8 months. The earlier in the loan tenure you prepay, the greater the interest savings since more future periods benefit.
What is the difference between APR and interest rate?+
Interest rate is the cost of borrowing the principal as a percentage. APR (Annual Percentage Rate) includes the interest rate plus all fees (processing fee, insurance, etc.) expressed as an annual rate. APR gives the true cost of a loan. In India, the RBI mandates disclosure of the Annualised Rate/APR to prevent hidden fee exploitation.
What is the reducing balance method of interest calculation?+
In the reducing balance (diminishing balance) method, interest is calculated on the outstanding principal after each payment. As you repay, the principal reduces, so interest charges decrease each period. This is the standard method for home loans, car loans, and personal loans. The flat rate method calculates interest on the original principal throughout - it appears lower but results in a much higher effective rate.