How is Interest Calculated on a Personal Loan

How is Interest Calculated on a Personal Loan

Personal loan interest calculation depends on the principal, the interest rate, the tenure and the method the lender uses. See the formula and a worked example on Rs. 2 lakh.
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Last updated: 13th October, 2026



In summary

Personal loan interest calculation uses three inputs: how much you borrow, the annual rate and the number of months. The method matters too. A reducing balance loan charges interest only on what you still owe, while a flat rate charges it on the full original amount.


  • EMI = P × R × (1 + R)^N ÷ [(1 + R)^N − 1].
  • On Rs. 2 lakh at 12% per annum over 24 months (2 years), reducing balance interest totals Rs. 25,953.
  • A flat 12% on the same loan would cost Rs. 48,000 in interest.
  • Early equated monthly instalments (EMIs) are mostly interest; later EMIs are mostly principal.

  • The Bajaj Finance Personal Loan rate ranges from 10% to 30.5% per annum.


Always check whether a quoted rate is flat or reducing. The Bajaj Finance Personal Loan EMI calculator shows the figures for your own loan.

What is a personal loan interest rate?

A personal loan interest rate is the yearly cost of borrowing, shown as a percentage of the amount you owe. Lenders set it based on your credit score, income, loan amount and their own policies. For a Bajaj Finance Personal Loan, the rate ranges from 10% to 30.5% per annum, depending on your profile.


The rate alone does not tell you the total cost. You also need the calculation method and the tenure.

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How do flat and reducing balance methods differ?

Flat rate (simple interest on the original amount)

A flat rate charges interest on the full original loan for the whole tenure, even as you repay. Interest = Principal × Rate × Years. It is simple to calculate but costs more than a reducing balance loan at the same quoted rate.


Reducing balance

A reducing balance rate charges interest each month only on the principal still outstanding. As each EMI repays some principal, the next month's interest falls. The Bajaj Finance Personal Loan works this way: as you repay, the outstanding balance falls, and so does the interest part of each EMI.


The same loan, two methods

Rs. 2,00,000 at 12% per annum over 24 months (2 years):


MethodMonthly EMITotal interestTotal repaid
Flat rateRs. 10,333Rs. 48,000Rs. 2,48,000
Reducing balanceRs. 9,415Rs. 25,953Rs. 2,25,953

At the same quoted 12%, the flat method costs Rs. 22,047 more. Read more about the differences between flat and reducing interest rate.

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How do you calculate the EMI?

The EMI on a reducing balance loan uses this formula: EMI = P × R × (1 + R)^N ÷ [(1 + R)^N − 1]


SymbolMeaningIn the example
PPrincipal (loan amount)Rs. 2,00,000
RMonthly interest rate = annual rate ÷ 12 ÷ 10012 ÷ 12 ÷ 100 = 0.01
NTenure in months24

Putting these in gives an EMI of about Rs. 9,415. Total interest = (EMI × N) − P = (Rs. 9,415 × 24) − Rs. 2,00,000, which is about Rs. 25,953 once rounding is removed.

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How does tenure change total interest?

A longer tenure lowers the EMI but increases the number of months you pay interest. On Rs. 2,00,000 at 12% per annum:


TenureMonthly EMITotal interest
12 months (1 year)Rs. 17,770Rs. 13,237
24 months (2 years)Rs. 9,415Rs. 25,953
36 months (3 years)Rs. 6,643Rs. 39,143
48 months (4 years)Rs. 5,267Rs. 52,805

Stretching from 12 to 48 months (4 years) cuts the EMI by about 70% but raises total interest about fourfold. Choose the shortest tenure your budget can carry.

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How does the rate change total interest?

On the same Rs. 2,00,000 over 24 months (2 years), a few percentage points make a visible difference:


Interest rateMonthly EMITotal interest
11% per annumRs. 9,322Rs. 23,718
12% per annumRs. 9,415Rs. 25,953
14% per annumRs. 9,603Rs. 30,462

Moving from 14% to 11% saves Rs. 6,744 in interest. That is why improving your CIBIL score before you apply can pay off.

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How does each EMI split between interest and principal?

This split is called the amortisation schedule. Interest for the month = outstanding principal × R. The rest of the EMI repays principal.


Worked example: Divya in Kolkata

Divya is 29 and works as a salaried schoolteacher in Kolkata. She earns Rs. 48,000 a month and has a CIBIL score of 735. She borrows Rs. 2 lakh at an illustrative 12% per annum over 24 months (2 years) for a family medical cost.


MonthEMIInterestPrincipal repaidBalance left
1Rs. 9,415Rs. 2,000Rs. 7,415Rs. 1,92,585
2Rs. 9,415Rs. 1,926Rs. 7,489Rs. 1,85,096
3Rs. 9,415Rs. 1,851Rs. 7,564Rs. 1,77,533

Each month, the interest falls and the principal repaid rises, though the EMI stays the same. Her EMI is about 19.6% of her salary. The processing fee on Rs. 2 lakh is up to Rs. 8,260, inclusive of applicable taxes, so her total borrowing cost is up to Rs. 34,213.


What can delay approval: a CIBIL score below 650, high existing EMIs relative to income, mismatched document details or several recent loan applications.

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How does prepayment reduce interest?

On a reducing balance loan, prepaying lowers the outstanding principal, so every later month's interest is smaller. You can either keep the same EMI and finish sooner, or keep the same tenure with a lower EMI, depending on your lender's terms.


VariantPart-prepayment charge
Term LoanUp to 4.72% of the principal prepaid, inclusive of applicable taxes
Flexi Dropline LoanNone
Flexi Hybrid LoanNone

Before prepaying a Term Loan, check that the interest you save is larger than the prepayment charge. On a Flexi Loan, there is no charge to weigh.

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What other costs should you add to interest?

Interest is the largest cost on most personal loans, but not the only one. Add these to compare offers fairly:


CostBajaj Finance figure
Processing feeUp to 4.13% of the loan amount, inclusive of applicable taxes
Bounce chargesRs. 700 to Rs. 1,200 per bounce
Penal chargeUp to 36% per annum on the overdue instalment

Paying every EMI on time avoids bounce and penal charges altogether. Set up a repayment mandate so EMIs are paid automatically.

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Which factors affect the interest rate you are offered?

FactorHow it affects your rate
CIBIL scoreA strong credit score can support a lower rate and a larger loan
Monthly incomeHigher, stable income signals lower repayment risk
Loan amount and tenureThese change the total interest you pay and may influence the rate offered
Existing obligationsFewer existing EMIs leave more repayment capacity
Employer profileStable employment supports your application

Review the current personal loan interest rate and charges before you apply. The rate you see on your offer reflects these factors.

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How can you lower the interest you pay?

  1. Choose a shorter tenure: You pay interest for fewer months.
  2. Borrow only what you need: Interest is charged on the principal.
  3. Improve your CIBIL score first: A better score can bring a lower rate.
  4. Part-prepay when you can: Flexi Loans carry no part-prepayment charge; Term Loans may charge up to 4.72%.

  5. Compare the total cost: Add the processing fee to the interest.


The Bajaj Finance Personal Loan is offered at a fixed rate, so your EMI stays the same throughout. Funds may reach your account within 24 hours* of approval.


*Terms and conditions apply.

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Key offerings: 3 loan types

  • Flexi Hybrid Loan
  • Flexi Dropline Loan
  • Term Loan

  • Withdraw and prepay – no extra charges
    You can withdraw from your limit and prepay as many times as you want, without extra charges.

  • Instalment pattern
    You can pay interest-only EMIs for up to 36 months, after which, the EMI will consist of both, the principal and the interest. EMI is applicable only on the withdrawn amount.

  • Flexi facility charges
    Flexi facility charges applicable based on your loan amount.

  • Withdraw and prepay – no extra charges
    You can withdraw from your limit and prepay as many times as you want, without extra charges.

  • Instalment pattern
    Fixed EMIs that cover both the principal and interest on the loan amount you withdraw.

  • Flexi facility charges
    Flexi facility charges applicable based on your loan amount.

  • Amount disbursed in one go
    The entire loan amount is disbursed at the start.

  • Instalment pattern
    Fixed EMIs that cover both the principal and interest.

  • Flexi facility charges
    No Flexi facility charges.

Personal loan interest rate and applicable charges

Type of fee

Applicable charges

Rate of interest per annum

10% to 30.5% p.a.

Processing fees

Up to 4.13% of the loan amount (inclusive of applicable taxes).

Flexi Facility Charge

Term Loan – Not applicable

Flexi Loans –Up To Rs 1,999 To Up To Rs 18,999/- (Inclusive Of Applicable Taxes)

Will be deducted upfront from loan amount.

Bounce charges

Rs. 700 to Rs. 1,200/- per bounce

“Bounce charges” shall mean charges for (i) dishonor of any payment instrument; or (ii) non-payment of instalment (s) on their respective due dates due to dishonor of payment mandate or non-registration of the payment mandate or any other reason.

Part-prepayment charges

Full Pre-payment:

  • Term Loan: Up to 4.72% (Inclusive of applicable taxes) on the outstanding loan amount as on the date of full pre-payment

  • Flexi Term (Dropline) Loan: Up to 4.72% (Inclusive of applicable taxes) on the outstanding loan amount, as on the date of full prepayment.

  • Flexi Hybrid Term Loan: Up to 4.72% (Inclusive of applicable taxes) on the outstanding loan amount, as on the date of full prepayment.

Part Pre-payment

  • Up to 4.72% (Inclusive of applicable taxes) of the principal amount of Loan prepaid on the date of such part Pre-Payment.

  • Not Applicable for Flexi Term (Dropline) Loan and Flexi Hybrid Term Loan.

Penal charge

Delay in payment of instalment(s) shall attract Penal Charge at the rate of up to 36% per annum per instalment from the respective due date until the date of receipt of the full instalment(s) amount.

Stamp duty (as per respective state)

Payable as per state laws and deducted upfront from loan amount.

Annual maintenance charges

Term Loan: Not applicable

Flexi Term (Dropline) Loan:

Up to 0.295% (Inclusive of applicable taxes) of the Dropline limit (as per the repayment schedule) on the date of levy of such charges.


Flexi Hybrid Term Loan:

Up to 0.472% (Inclusive Of Applicable Taxes) Of The Dropline Limit During Initial Tenure. Up to 0.295% (Inclusive Of Applicable Taxes) Of Dropline Limit During Subsequent Tenure

Credit guarantee scheme feeUp to 1.18% p.a. (pro-rated daily till 31st March) (inclusive of all applicable taxes) of the loan amount
Credit guarantee scheme renewal feeUp to 1.18% p.a. (inclusive of all applicable taxes) on the outstanding loan amount as on April 01 of the subsequent Financial Year.
*Renewal Fee to be collected only for 3 subsequent financial years.
 
**If the Remaining Tenure is less than 12 months, the CG Fee in subsequent years shall be charged prorated.

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Frequently asked questions

Calculation

Rates and cost

What is the difference between flat and reducing balance interest?

A flat rate charges interest on the original loan amount for the whole tenure. A reducing balance rate charges interest only on the principal still outstanding each month. On Rs. 2 lakh at 12% per annum over 24 months (2 years), the flat method costs Rs. 48,000 in interest, while reducing balance costs Rs. 25,953.

Interest each month is charged on the balance still owed, which is largest at the start. In the example above, month 1 interest is Rs. 2,000 of a Rs. 9,415 EMI. As you repay principal, the balance falls, so less of each later EMI goes to interest and more repays the loan.

Keep a strong CIBIL score by paying every EMI and card bill on time, maintain a stable income and keep existing debts low. Meeting the eligibility criteria comfortably also helps. Compare offers on the total cost of borrowing, including the processing fee, rather than the quoted rate alone. Check whether each quote is flat or reducing.

The Bajaj Finance Personal Loan rate starts at 10% per annum and goes up to 30.5%, subject to eligibility. The rate you are offered depends on your credit score, income, employer, loan amount and tenure. The loan is offered at a fixed rate, so your EMI stays the same throughout.

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Bajaj Finance Limited has the sole and absolute discretion, without assigning any reason to accept or reject any application. Terms and conditions apply*.
For customer support, call Personal Loan IVR: 7757 000 000