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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.

Compound Interest

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 is Interest Calculated on an Education Loan?

Interest on an education loan is calculated using the following formula: 

A = P*(1 + r/n) ^n*t

Where,

A represents the total interest charged

P is the principal

r is the educational loan interest rate

n is the compounding rate

t is the loan tenure

Let’s understand how the interest is calculated using an example. Say, if you’ve taken a loan of Rs. 10 lakhs, on an interest rate of 7% for two years. Typically, the compounding rate for education loans is one year; so, you can substitute n for 1. For this scenario, the formula will look like this:

A = 1000000 * (1 + 0.07/1) ^ 1*2

A = Rs. 1014049

Therefore, you’d pay a total interest of Rs. 14,049 by the end of the loan tenure. Looks tedious, right? Well, you can always use an education loan interest calculator to calculate anything you need to find regarding a loan.

Additional Read – Facts you need to know about Education Loan

How to Calculate EMIs?

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. 

Additional Read – Can You Get Education Loan for Online Education?

Factors Affecting Education Loan 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.

In summary

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.
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