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Loan Interest Rate Formula:
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Loan interest rate calculation helps determine the effective interest rate on a loan when you know the EMI (Equated Monthly Installment), principal amount, and loan tenure. This is particularly useful for comparing different loan offers and understanding the true cost of borrowing.
The calculator uses the iterative formula:
Where:
Explanation: The equation is solved iteratively using numerical methods (Newton-Raphson) to find the interest rate that satisfies the loan amortization relationship.
Details: Understanding the effective interest rate helps borrowers compare loan products, assess affordability, and make informed financial decisions. It reveals the true cost of credit beyond just the EMI amount.
Tips: Enter the EMI amount in your currency, the principal loan amount, and the total number of monthly payments. Ensure all values are positive and the EMI is greater than the principal divided by the number of payments.
Q1: Why is iterative calculation needed?
A: The interest rate equation cannot be solved algebraically, so numerical methods are required to approximate the solution.
Q2: What is a typical interest rate range?
A: Interest rates vary by loan type and creditworthiness, but typically range from 4% to 20% annually for most consumer loans.
Q3: How does loan tenure affect interest rate?
A: Longer tenures generally have higher total interest costs but lower EMIs, while shorter tenures have higher EMIs but lower total interest.
Q4: Are there limitations to this calculation?
A: This assumes fixed interest rates and equal monthly payments. It may not account for processing fees, insurance, or other loan charges.
Q5: Can this be used for all types of loans?
A: This calculator works for fixed-rate amortizing loans like home loans, car loans, and personal loans with equal monthly payments.