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How is Interest Calculated on Education Loans?

How is Interest Calculated on Education Loans?

Yes, opting for an education loan is the quickest and easiest way to begin a rewarding career without emptying your savings. Other than that, opting for a student loan also grants you tax benefits and makes for a solid entry into your credit history.

These reasons alone make education loans a worthy investment. However, to ensure that they don’t become a burden later on, you need to have a 360-view of all the terms attached to the loan – and knowing how the interest rate is calculated is one of them.

Let’s start by understanding the primary method by which lenders calculate interest and how you can use an education loan interest rate calculator to compute it.

Simple vs Compound Interest on Education Loans

Compound interest is a type of interest rate calculation method where the interest of the next cycle (typically a month) is calculated based on both the principal and the earlier levied interests. Simply put, it can be thought of as ‘interest on interest.’

How to Calculate Simple Interest on Education Loans

When looking at how to calculate student loan interest, there are two ways to go about it. The first is simple interest. Simple interest is one of the most straightforward ways to calculate the interest you will need to pay on a loan. Unlike compound interest, it does not stack up over time. Instead, interest will only be calculated on your original loan amount (or principal) throughout your tenure.

The formula for how simple interest is calculated on education loans is: 

Interest = Principal x Rate x Time

For example, say you borrow an initial amount of Rs. 5,00,000 at an annual interest rate of 10% for 3 years. Then, your interest would be:

5,00,000 x 10% (or, more simply, 10/100) x 3 = Rs. 1,50,000

So the total repayment amount would be Rs. 5,00,000 + Rs. 1,50,000 = Rs. 6,50,000

How to Calculate Compound Interest on Education Loans

It is also essential to know how compound interest is calculated on education loans. Compound interest is calculated differently since interest is charged not only on the original loan amount but also on the interest already accumulated.

The formula for how to calculate an education loan compound interest is:

A = P (1 + R / N)^(N × T)

Where:

P is the principal

R is the annual education loan interest rate

N is the number of times interest is compounded in a year

T is the loan tenure in years

For example, if you borrow ₹5,00,000 at 10% interest, compounded annually for 3 years, the amount becomes ₹5,00,000 × (1 + 10/100)³, which is approximately ₹6,65,500. The extra ₹1,65,500 is interest accumulated over time, including interest on interest.

How is Education Loan EMI Calculated?

Borrowers usually pay back the education loan through EMIs. So, it makes sense to calculate the instalment figure rather than the total interest amount. Let’s look at the EMI calculation formula, which is slightly different from the regular compound interest formula.

EMI Amount = [P * r * (1+r) ^n] / [(1+r) ^N-1]

So, if you’ve borrowed Rs. 5 lakhs at a 12% rate of interest for two years, your first EMI would approximately amount to Rs. 23,356.

This calculation may be even more tedious than the interest rate calculation. Fortunately, the internet offers many education loan EMI calculators to make this task easy for you. To quickly and easily calculate your approximate education loan EMI, visit Tata Capital’s Education Loan EMI calculator.

What Impacts Your Education Loan Interest & EMI?

Multiple factors affect the calculation of EMI on an education loan. These include:

  • The principal amount
  • Loan tenure
  • Education loan interest rate

In addition to these factors, the loan applicant must be an Indian citizen and have completed their senior secondary schooling. They should also have completed their 10th and 12th grade (and their graduation, if applying for a Master’s degree) and have their mark sheets ready.

Most financial institutions also require borrowers to provide additional documentation, such as an admission letter to the institution for which they need a loan, the fee structure, and documents like salary slips and ITR proof of the co-applicant. They will also need to know if the institution is accredited and recognised by a competent authority in India or abroad.

Tips to Reduce Your Education Loan Interest Burden

Below are some tips for lowering your education loan interest:

1. Use an EMI calculator before applying

Before applying, check online EMI calculators to estimate possible monthly payments.

2. Determine the type of interest and choose a shorter tenure

First, determine if your education loan is simple or compound interest. Additionally, opt for shorter loan tenures, as they reduce interest paid, even though monthly EMIs may be higher.

3. Compare loan offers and negotiate interest rates

Research online and speak to different lenders. This will help you identify the interest rates best suited to your needs and negotiate offers.

Conclusion

Now that you know the methods lenders employ to calculate your interest and EMIs, you can make an informed decision and go with a lender that offers the most affordable loan terms.

Well, you want to cut that search short, opt for Tata Capital’s attractive personal loan for education.

From affordable interest rates to convenient eligibility, approvals, and disbursals, we offer it all!

Start fine-tuning your loan EMIs by using our personal loan EMI calculator today! To learn more, download the Tata Capital app or visit the website today!

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FAQs

Are the EMI calculator and the calculator for interest rates on student loans identical?

No, the educational loan EMI calculator is not the same as an interest loan calculator. An EMI calculator will only provide information regarding monthly EMI on the education loan.

Is a tax deduction available for student loans?

Yes, tax deductions are available for student loans. According to the Income Tax Act of 1961, individuals can write off interest payments on an education loan during one financial year.

How is simple interest calculated on education loans?

To calculate simple interest on an education loan, the following formula can be used: a = p(1 + (r*t)), where- a = amount p = principal r = interest rate t = time

What does an education loan cover?

Education loans will generally cover a student’s costs for a course, including tuition, boarding, books, travel equipment, and more.

How do I manually calculate student loan interest for one year?

To determine how much is the interest on student loans, multiply the loan principal by the annual interest rate. For simple interest, this gives the total interest payable for one year on the borrowed amount.

Do Indian education loans use simple or compound interest?

To determine whether an education loan uses simple or compound interest, check with your lender. Most Indian education loans are charged at compound interest.

 

How is EMI calculated for an education loan?

How an education loan EMI is calculated is by using the loan amount, interest rate, and tenure, accounting for compounding. It can vary based on the lender.

Does making payments during the moratorium reduce total interest?

Yes, paying interest during the moratorium prevents it from compounding, significantly reducing the total interest and overall repayment amount.

What factors affect the interest rate on an education loan in India?

When looking at how to calculate education loan interest,  factor in course type, institution, loan amount, co-applicant’s credit profile, collateral, and the lending institution’s policies.

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