Education Loan

How to Calculate Simple Interest on Education Loan?

How to Calculate Simple Interest on Education Loan?

On this Page:

Find out how to calculate simple interest on education loans and its advantages over compound interest. Ensure affordable studying abroad with our expert tips and strategies.

GyanDhan
Rohit Gidwani
Updated on:  19 Feb 2024  | Reviewed By: 
Aman 
| 307 | 8  min read

Choosing the right education loan is a pivotal decision for students studying abroad, yet many find themselves navigating complex financial jargon without fully understanding the implications. This blog aims to bridge this knowledge gap by elucidating the concept of simple interest (SI) and its comparison with compound interest. Armed with insights into how simple interest works, students can engage in informed discussions with lenders, ensuring they secure terms that won't lead them into unfavourable financial obligations. Understanding simple interest is more than about calculations; it's about securing your financial future with clarity and confidence.

Check Your Education Loan Eligibility

Sprinkles

What is Simple Interest on Education Loan?

Simple interest is a financial term used to describe a method of calculating the interest charge on a loan. The interest is computed only on the principal amount, or the original sum borrowed, without compounding. This means that, regardless of the length of the loan term, the borrower is only charged interest on the amount initially lent. This calculation method is particularly beneficial for students studying abroad, as it can make the cost of borrowing more predictable and easier to manage.

Understanding how to calculate simple interest on education loan, including how to calculate student loan interest per month, is straightforward. Use the formula:

Interest = Principal x Rate x Time (I = P x R x T), where:

  • list items P is the principal amount (the original sum borrowed),
  • list items R is the annual interest rate 
  • list items T is the time the money is borrowed for, in years.

Comparison with compound interest

To illustrate the differences between simple and compound interest, consider the following tabular comparison:

Basis of Difference Simple Interest Compound Interest

Calculation basis

Calculated on the principal amount only.

Calculated on the principal and the accumulated interest.

Interest accumulation

Does not accumulate interest on top of interest.

Accumulates interest on the principal plus any accrued interest.

Cost over time

Generally results in a lower total cost of the loan.

Can significantly increase the total repayment amount due to interest compounding.

 

Looking for an abroad education loan?
By entering my phone number, I give consent to override NCPR and recieve WhatsApp messages.
Sprinkles

Calculating EMI on Simple Interest Education Loans

Understanding how to calculate simple interest on education loan is pivotal for financial planning. Here's a concise breakdown:

  • list items Principal amount: The total borrowed sum from the lender, forming the base for interest calculation.
  • list items Annual interest rate: Given as a percentage, this rate varies by lender and can be influenced by the loan type, your credit score, and the loan's terms.
  • list items Time period: The loan repayment duration, typically in years, determines the total interest paid over the loan's life.

Utilizing GyanDhan's Education Loan EMI Calculator is a practical step for students and their families to precisely gauge the financial implications of taking out an education loan for studying abroad. This tool simplifies the complex process of loan calculation, turning it into an accessible, user-friendly experience.

You just need to input the education loan amount (Principal), the interest rate, and the loan tenure (number of months) in the education loan EMI calculator, and it immediately calculates the education loan EMI using the mathematical equation:
 

EMI = [P x R x (1 + R)n]/[(1 + R)n - 1]

where P = Principal, R = Rate of Interest, and n = Tenure/duration in number of months

Sprinkles

Interest Rate of Different Lenders

When considering education loans for studying abroad, it's vital to compare the interest rates offered by different lenders. Here's a simplified table showcasing the varying starting rates:

Lender Name Secured Loan Interest Rate Unsecured Loan Interest Rate

Union Bank of India

9.25% - 11.5%

9.75%

Axis Bank

9.99%

10.75% - 12.5%

ICICI Bank

9.9% - 10.0%

10.99% - 12.75%

IDFC First Bank

9.5% - 11.0%

10.75% - 13.0%

HDFC Credila

10.25% - 10.75%

11.75% - 12.75%

Avanse

10.75% - 12.0%

12.0% - 13.0%

Incred

NA

11.85% - 13.25%

Auxilo Finance

11.5% - 12.5%

12.0% - 13.5%

Prodigy Finance

NA

11.5% - 13.5%

MPower Finance

NA

12.99% - 15.99%

State Bank of India

10.15% - 11.15%

NA

Bank of Baroda

9.7%

NA

Check Your Education Loan Eligibility

Sprinkles

Advantages of Simple Interest Abroad Education Loans

Simple interest on education loans is highly beneficial for students due to its straightforward calculation method, which applies interest charges directly to the principal amount borrowed. This clarity offers several key advantages, enhancing financial predictability and management throughout the loan's duration.

  • list items Predictability in repayment amounts: The consistency of simple interest calculations ensures that students can anticipate their monthly payments without worrying about fluctuating interest charges. This predictability aids in long-term budgeting, allowing students to plan their finances with greater accuracy and stability.
  • list items Lower total cost over the life of the loan: Since simple interest doesn't compound on accumulated interest, the overall cost of borrowing is often lower compared to loans with compound interest. This feature can result in significant savings over time, reducing the financial burden on students and their families.
  • list items Easier financial planning and management: The straightforward nature of simple interest calculations simplifies the financial planning process. Students can easily understand how much interest they will be paying over the loan term, facilitating more informed decision-making regarding loan selection, repayment strategies, and budget adjustments.

Did you know? You can save BIG with smart repayment strategies. We have listed them down for you here.

Sprinkles

Impact of Paying Simple Interest During Moratorium

Paying simple interest on education loan during a moratorium, including understanding how to calculate student loan interest per month, significantly impacts the overall cost. For a loan of ₹5,00,000 with a 10% annual interest rate and a 12-month moratorium, paying the simple interest monthly, approximately ₹4,167 (₹5,00,000 x 10% ÷ 12), prevents interest from adding to the principal during this period.

This approach not only keeps the loan balance from increasing but also ensures that the total interest paid over the loan's tenure is considerably less. For instance, if the interest were not paid during the moratorium, the total payable amount by the end of the loan period could be significantly higher, due to interest compounding on the increased principal. Paying interest during the moratorium thus offers long-term savings and reduces the financial strain post-study period.

Calculate your Education Loan EMI

Sprinkles

Tips for Managing Simple Interest Loans

Effectively managing simple interest on education loan can greatly impact the overall cost and duration of your loan. Here are detailed strategies:

  • list items Interest payments during grace period: Utilizing the grace period to make interest payments can significantly reduce the principal amount before regular repayments commence. This proactive approach can save money in the long run by decreasing the amount of interest that accrues on the reduced principal.
  • list items Paying above the minimum: Regularly paying more than the minimum required amount each month can expedite the reduction of the principal balance. This method not only shortens the loan term but also lessens the total interest paid over the life of the loan.
  • list items Regular review of loan statements: Staying informed about your loan's status by frequently reviewing statements and terms allows you to catch any changes in interest rates or terms. Additionally, it opens up opportunities to refinance your loan at a more favorable interest rate, potentially leading to significant savings.

In conclusion, understanding simple interest and its impact on education loans is crucial for students planning to study abroad. By making informed choices, such as paying interest during the moratorium period and managing loans effectively, students can significantly reduce their financial burden. GyanDhan offers a comprehensive abroad education loan with the best interest rates as per your specific requirements. All you have to do is check your loan eligibility with GyanDhan, enabling you to begin your educational journey abroad with financial confidence and ease.
 

Read Also

Sprinkles

Frequently Asked Questions

How to calculate simple interest on education loans and why is it beneficial?

To calculate simple interest on education loans, multiply the principal amount by the interest rate and then by the time in years. This calculation method ensures borrowers pay interest only on the original loan amount, not on accumulated interest, making it a cost-effective option for managing education-related expenses.

Are education loans from Indian lenders compounding in nature?

Yes, education loans from Indian lenders are typically compounding in nature, meaning that interest is calculated on the principal amount as well as on the accumulated interest over time. In case you pay simple interest during moratorium then it is not compounding in nature. This compounding effect can vary in frequency depending on the lender's policy, often calculated annually or quarterly.

What factors influence simple interest on education loans?

Factors affecting what is simple interest on education loans include the borrower's credit score, the loan amount, the repayment term, and whether the loan is secured or unsecured. Understanding these factors can help borrowers secure the best possible rate for their education financing needs.

How to calculate simple interest on education loan in terms of private lenders?

Private lenders may have specific policies that influence how to calculate simple interest on education loans, such as requiring interest payments during study periods to avoid compounding. Borrowers should review these policies carefully to understand the true cost of their loan and avoid potential misunderstandings. You can read more about it here.

What are the advantages of understanding how to calculate simple interest on education loans for long-term financial planning?

Understanding how to calculate simple interest on education loans can significantly aid in long-term financial planning by providing clear insights into the total cost of borrowing for education. This knowledge helps borrowers make informed decisions, potentially saving thousands in interest payments over the life of the loan

Check Your Education Loan Eligibility


Sprinkles

Have More Questions on This Topic?

Ask from a community of 10K+ peers, alumni and experts