If you want to take a loan from the bank or any financial institution to meet your money needs, then you are also told about the interest rates. According to the rate at which interest is charged, you make a budget plan. But you will not know how financial institutions decide the interest rate on a loan.
How the interest rate calculator helps you
Apart from giving the exact interest rate, it:
– Keeps you abreast of outstanding abilities.
– Allows you to check your repayment dues, which affects your credit score.
– If you have many loans going on, then it gives you the facility of which EMI to be paid later and which first.
– Prevents the troubles of manual calculations and keeps you updated on finances.
Before we talk about the different parts of the interest rate calculator, let us tell you what are the interest rates and formulas.
What is the interest rate?
Interest paid regularly at a particular rate for the use of money lending or for delay in repayment of a loan is known as interest.
In simple words, interest is the value of the money lent. A lender takes a loan ratio from the borrower as interest, which is usually taken as the annual percentage of the loan.
Interest rate fixation formula
The formula for determining the rate of interest and total amount due in EMI is:
E = P * r * (1 + r) ^ n / ((1 + r) ^ n-1)
E – Repaying EMI
P – Principal Loan Amount
R / r – Applicable interest rate
N / n – Tenure in years
Over time you will find that the monthly interest rate is decreasing. With this, the amount of the loan amount also decreases. Generally, personal loans are given to the borrowers at a fixed interest rate and do not change throughout the term.
In the fixed interest rate pattern, the customer pays the EMI of the loan in a fixed percentage over the entire period. This is an ideal situation for budget planning for a long period, which is not affected by the changes coming in the market.
There is also a changing interest rate, in which there are fluctuations over time. Fluctuations basically depend on factors like inflation or market index. Floating interest rate loans are linked to the marginal cost of the fund-based lending rate. The main advantage of floating rate is that they are available at slightly cheaper interest rates.
Factors affecting interest rates
There are many factors affecting the interest rates that the borrowers get on their loan. Usually they cannot be controlled, but understanding them proves helpful.
When the unemployment rate is low, inflation rises and businesses are at a higher cost. In an economy, on the contrary, when employment is low, consumer activities occur a lot, causing interest rates to rise.
Supply and demand
Simple demand and supply affects the interest rate on the loan. When the need for money or loan increases in the market, lenders raise rates and when the demand for credit decreases, the rates are lowered to lure more borrowers.
When the interest rates are reduced, it is more likely that people borrow money to spread their business, to meet their needs of higher cost like property or car. This will increase people’s spending power and will also give life to the economy. Basically, central banks use interest rates as the main tool to control the economy. Usually, when the economy is slowing down, central banks reduce interest rates and increase when they are fast.
Economic Policies and Inflation
The monetary policies decided by the central government affect the interest rates in the country’s economy to a great extent. Inflation includes those who affect interest rates. The increase in prices of goods and services shows that the purchasing power of people is decreasing. At the macroeconomic level, it is closely linked to interest rates and large-scale changes will have an impact on others.
Controlling factors that determine interest rate
A person’s credit report plays an important role in deciding interest rates. The better the credit score, the more chances you will get a better deal at a better interest rate. Apart from this, the amount borrowed also affects the interest rate of the loan. This is a simple equation of demand and the higher the demand for supply, the higher the rates. When many people do not need a loan and have a lot of money to lend, the interest rate decreases.
A good credit score helps the customer to take a loan at better interest rates. These are the things through which attention can be paid to get better interest rates from lenders. Let’s talk about them.
Do not take credit quickly: Inquiring about credit frequently means that the customer is finding it difficult to get a loan. The lender considers it a risky customer.
Take advantage of the opportunity from where it feels right: When there is a downturn in the economy, this is the right time for customers to take loans. When there are fewer borrowers, the interest rate is also lower. In such a situation, you can take a loan at low interest rates.
Secured Loans: Lenders feel relaxed when they pledge something with them.
Payment Term: Paying a small amount as a down payment and choosing a longer loan term, you have to pay an increased interest rate. This puts the lenders at risk. Lenders offer lower interest rates due to higher down payment and shorter duration.
Therefore, before finalizing any deal for the loan, find out all the rules through the interest rate calculator. When you apply for a loan, interest rates are an important factor to consider. It is one of 4 factors, of which the calculator tells one.
The interest rate calculator helps in determining any unknown variable, which gives the borrower more detailed information to make a good decision.