How is a personal loan interest rate calculated? Know here

Personal loans are unsecured loans provided by financial institutions to meet the financial needs of individuals. The interest rate for personal loans is usually higher than those of other types of loans as they are unsecured. The interest rate for personal loans is calculated based on several factors, such as the borrower’s credit score, employment history, and loan amount.

Calculation of personal loan interest rate

The formula for personal loan interest rate calculation is:

Interest Payable = Principal x Rate of Interest x Tenure


Principal refers to the loan amount borrowed

Rate of Interest refers to the interest rate charged by the lender

Tenure refers to the duration for which the loan is borrowed

The interest rate can be calculated in two ways:

Flat interest rate: In this method, the interest rate is calculated on the entire loan amount and remains constant throughout the loan tenure.

Reducing balance interest