Thursday, April 28, 2022

Tips On Calculating Interest On A Loan


When you lend some money from financial organizations, you are considered to be responsible for paying it back within a stipulated tenure and an agreed rate of interest. Here the rate of interest generally depends on a multitude of factors which will be explained in the paragraphs below. First, let’s understand this business of lending money from a financial institution’s perspective.



Compute How Interest Rate Varies
These companies lend out money to retail or corporate clients to make a profit. Now, the exact amount of interest hugely depends on the cost of funds (Repo rate/Govt bonds), the riskiness of the customer, tenure of the loan and more. The loan amount, tenure and process also depend on the creditworthiness of customers and a bad credit loan (elucidated later) normally is not collateral-free, originates with a greater interest rate and after enhanced due diligence by financial institutions.

Consider The Riskiness Of Customer:
Customers consuming the loans from financial institutions can be broadly categorised into retail and commercial clients. Commercial clients are the companies which take loans from banks to grow their business, increase capacity or run the day to day operations. Financial institutions have credit risk teams working in the back-end to decide the creditworthiness of these commercial clients and thus opine on the maximum amount that can be disbursed for a particular tenure. These clients generally need huge sums of loans and thus this due diligence is necessary for financial organizations to assure that the amount does not become Non-Performing Assets (NPA).

Have A Look At Your Credit Score
A client with a good credit history is blessed with a comparatively great credit score and will get loans from financial institutions without much hassle and at a good interest rate. However, if the customer does not have any credit history or has a poor credit rating then the financial associations hesitate in providing bad credit loans. These credit loans normally come with collateral (house/gold/property) attract a higher rate of interest and are disbursed after enhanced due diligence performed by the bank.

Check Out The Current Status Of Your Loan
However, retail clients are huge in number and their loan necessities are in general much smaller in amount. So this provides a high volume low value opportunity for financial institutions to venture into. The riskiness of a retail customer is generally calculated by their credit score. The credit score for an individual is built on his financial behaviour of the past-

  1. Whether the customer had taken some loans in past and has been paying/paid the EMIs on time and without fail
  2. Whether the customer uses a credit card and repays the amount in stipulated time 

Hope this above-listed information has taught you to compute the exact interest rate on your current loan. So go ahead. Keep the count right and pay the amount on time. Good luck.


Author: verified_user