when it comes to loans, people are often confused about which type of loan is better for them - a simple interest loan or a compound interest loan. if you are also wondering whether you should take a simple interest loan or not, read below to get some clarity.
what is a simple interest loan?
a simple interest loan is a type of loan where the interest is based on the principal amount of the loan. in the case of a compound interest loan, the interest is based on the principal amount and the interest that accumulates on it in every period.
the calculation of a simple interest loan is easier compared to the compound interest loan as it is calculated only on the principal amount of a loan.
simple interest formula
simple interest is calculated by applying the following formula:
simple interest = p×r×n
p refers to the principal amount: all the calculations of simple interest are based on the principal amount. unlike compound interest, the simple interest does not add any interest amount to the principal sum for calculating the interest for the next installment.
r is the annual interest rate: the rate of interest in simple interest is in the format of r/100. for example, if the rate of interest of a simple loan is 6% per annum, the value of r would be 6/100= .06.
n represents the term of the loan in the 'year' format: for example, if the loan tenure is of 3 years, we will input n's value as 3 in the formula to calculate the simple interest. if the time period is in months, we will have to divide the result by 12 (the number of months in a year).
now let's assume that you are taking a simple interest loan of ₹10 lakh at an annual interest rate of 6 percent, and the loan tenure is 3 years. the amount of simple interest paid will be:
simple interest = ₹10 lakh x 0.06 x 3
total simple interest = ₹1,80,000
and the total amount paid is: ₹10 lakh + ₹1.80 lakh = ₹11.80 lakh
simple interest loan products
many banks and non-banking financial companies (NBFCs) offer a number of simple interest loan products for example - car loans, education loans, mortgage loans, etc. in the case of simple interest car loans, also known as vehicle finance loans, the interest is calculated based on the principal amount on a daily basis. in the case of simple interest student or education loans, the interest is calculated based on a simplified daily interest formula. here, the interest is calculated only on the balance, rather than on previously accrued interest. another example of simple interest loans is mortgage loans. in this case, the interest is calculated on a daily basis using the simple interest formula.
generally, simple interest products are better if you are taking out a loan but if you want to invest, it's better to find a suitable compound interest product. simple interest loans, be it an auto loan, student loan, or mortgage loan, are the easiest loans to manage payments. if you have a sturdy income and have the discipline to pay off both the principal and interest amount on time, it is the best way to get a simple interest loan. it's the best type of loan to budget your payments, and to pay off your loan in full.
you can use the CRED simple loan calculator online to make your calculations easier, faster, and error-free. the CRED simple interest calculator is free and can help you estimate the principal amount, interest rate, and loan tenure for your simple interest loan calculation.
use CRED simple interest loan calculator