"Understand how personal loan interest is calculated in India. Use EMI formulas, examples, and tools to compare rates and plan smartly before you borrow."
Published: 30 April 2025
Updated: 30 April 2025
Ever wondered why two people with the same loan amount pay different EMIs? Or why your total repayment is so much more than what you borrowed.
Whenever you consider getting a personal loan, the first thing you want to know is: how much will it cost? The answer lies in how personal loan interest rates are calculated. At My Mudra, we believe that understanding this process can help you borrow smarter and save money.
Here’s how personal loan interest rates are charged in India, with all the key facts you need to know before you click "apply."
The personal loan interest rate is the percentage at which the lender is charging you for the borrowed funds. It is typically expressed as an annual percentage rate (APR). The interest rate you qualify for is based on your credit score, income, loan amount, and loan term.
For example, as of 2025:
Other banks offer similar ranges, so always compare before deciding.
Indian banks primarily follow the reducing balance method to determine interest on personal loans. This means interest is charged only on the outstanding principal, not the original loan amount, and it reduces every month as you repay.
The basic formula for calculating interest is:
Let's take an example to understand this:
Sunil borrows ₹5,00,000 from a bank. He is borrowing at an interest rate of 12% per annum. He will be repaying it in 5 years, i.e., 60 months.
The interest rate is 12% per year.
By calculation, first month's interest = ₹5,00,000 x 12/100 x 1/12 = ₹5,000
First month's EMI = ₹13,333.33
So Sunil will have to pay ₹13,333.33 for the first month.
For the following month, the interest will be calculated on the new balance, i.e., ₹5,00,000 - ₹8,333.33 = ₹4,91,666.67.
In the same way, interest will be levied on the new outstanding balance every month which you get by subtracting the monthly principal from the initial loan amount, and thus EMIs will be computed. Over time, the interest part decreases and the principal part increases. That’s the magic of the reducing balance method.
Wondering why your friend got a lower rate? Here’s what influences personal loan interest rates in India:
Here’s a quick look at what is the interest rate on an instant personal loan at leading banks:
|
Bank/Lender |
Personal Loan Interest Rates (p.a.) |
|
SBI |
10.30% – 15.30% |
|
HDFC Bank |
10.90% – 24.00% |
|
ICICI Bank |
10.85% – 16.65% |
|
Axis Bank |
11.25% – 22.00% |
|
Bajaj Finserv |
10.00% – 31.00% |
|
Yes Bank |
11.25% – 21.00% |
|
Kotak Mahindra Bank |
10.99% – 16.99% |
Tip: Always check the latest rates before applying.
Calculating EMIs manually can be confusing. Here’s when a personal loan EMI calculator comes in handy. Simply enter your loan amount, interest rate, and tenure – the calculator will do the math for you.
Benefits of using a calculator:
Try our Personal Loan EMI Calculator to see how much you’ll pay each month.
Want to check the math? Here’s a step-by-step simple interest calculation method:
Example:
Monthly Interest = ₹1,000
Total Interest = ₹36,000
Total Repayment Amount = ₹1,36,000
Understanding how personal loan interest is calculated in India is the first step to borrowing smart. The reducing balance method means your interest outgo changes every month, and using a personal loan EMI calculator can give you a clear picture before you borrow.
At My Mudra, we’re here to help you compare personal loan interest rates, estimate your EMIs, and make confident financial decisions. Take a few minutes to crunch the numbers and choose the best loan for your needs.
Ans: Interest is usually calculated using the reducing balance method, where interest is applied on the outstanding principal each month.
Ans: Banks use the formula based on principal, interest rate, and tenure. Most offer online calculators for quick results.
Ans: Multiply your outstanding principal by the monthly interest rate. For the first month, it’s the full principal; for later months, it’s the reduced balance.
