An education loan is a valuable solution to finance higher studies abroad. They come with interest payments which is the cost of borrowing the money. Education loans generally have simple interest rates, which are easier to understand and calculate compared to compound interest rates. Knowing how to calculate simple interest on an education loan helps you make a proper repayment plan and manage finances effectively. Let’s explore the calculation part, factors affecting interest rates, and common FAQs to help you make informed decisions.
Table of contents
What is a Simple Interest on an Education Loan?
Simple Interest on an education loan calculates interest on the principal amount and remains constant throughout the loan tenure. Unlike compound interest, which accrues on both the principal and accumulated interest, simple interest simplifies the calculation process.
For example, if you borrow INR 5,00,000 at 8% p.a. for 5 years, the simple interest calculates based on the original loan amount (principal).
Here’s what you should know about simple interest on education loans:
- Lenders calculate the interest on the borrowed amount and keep it fixed throughout the loan tenure.
- Simple interest keeps the total interest lower compared to compound interest.
- The total interest increases with longer loan tenures, but managing it is still easier than with compound interest.
- The constant interest rate helps you estimate your total repayment amount early, making financial planning more straightforward.
Please note that the calculation process remains the same whether you take an education loan against Fixed Deposit or an education loan against PF.
How to Calculate Simple Interest on an Education Loan?
To calculate the simple interest rate on an education loan, you must know the principal amount, annual interest rate, and loan tenure. The formula to calculate simple interest on an education loan is-
Simple Interest (SI)= P x R x T, where,
P= Principal Amount
R= Interest Rate
T= Tenure / Time Duration
Considering the formula, SI = 5,00,000 x 8% x 5 years = INR 2,00,000. It means the total interest you will pay after 5 years is INR 2,00,000. This is how easy simple interest calculation on education loans is.
Once you have calculated the simple interest, you can determine the total repayment amount, which includes both the principal and the interest.
Total Repayment= Principal + Interest
INR 5,00,000 + INR 2,00,000 = INR 7,00,000
Sample Table for Simple Interest Calculation
To simplify the understanding of how interest works on different principal amounts and varying interest rates, here’s a sample table-
| Principal (P) (INR) | Interest Rate (R) (%) | Loan Tenure (T) (Years) | Simple Interest (INR) | Total Repayment (INR) |
| 5,00,000 | 8% | 5 | 2,00,000 | 7,00,000 |
| 3,00,000 | 10% | 3 | 90,000 | 3,90,000 |
| 7,50,000 | 7% | 6 | 3,15,000 | 10,65,000 |
| 2,00,000 | 6% | 4 | 48,000 | 2,48,000 |
| 4,00,000 | 9% | 2 | 72,000 | 4,72,000 |
This table shows how simple interest increases with both the principal amount and the interest rate, demonstrating the financial implications of borrowing larger amounts or agreeing to higher interest rates.
Also Read: Planning to study abroad? To understand what happens to your education loan if your visa is rejected, check out this blog. Explore different scenarios and take the necessary steps.
How to Calculate EMIs on Simple Interest Education Loans?
Now that you know how to calculate simple interest on education loans, it is important to ascertain what your EMI will be. Based on the total repayment amount and your loan tenure, you can plan your monthly or quarterly repayments.
Once you have the total repayment amount, you can calculate the EMI by dividing the total repayment amount by the number of months in the loan tenure. This gives you a fixed monthly repayment amount.
EMI= Total Repayment Amount/ Total Loan Tenure (Months).
Considering the above example, where the principal amount is INR 5,00,000 at 8% for 5 years, the total repayment will be INR 7,00,000. Based on the same, the EMI calculation will be as follows-
EMI = 7,00,000/ 60 = INR 11, 667
Thus, the monthly EMI you would pay for this loan would be INR 11,667
You can always verify your EMI using an EMI calculator available on most bank websites or financial websites. These calculators take into account the principal, interest rate, and loan tenure to provide you with the exact EMI amount.
While the formula gives a theoretical calculation, an online EMI calculator may also consider minor adjustments like rounding off and minor fees that could impact the exact figure. Some consider a moratorium period to give you more simpler and exact calculations based on your education loan terms and conditions.
Factors Affecting Simple Interest on Education Loans
Several factors determine the interest rate on education loans, and understanding them helps borrowers make informed decisions. The key factors affecting the calculation of simple interest on education loans include the loan amount, interest rate, and loan tenure. Each of these factors directly impacts the total simple interest on your student loan.
Loan Amount (Principal)
The amount you borrow directly affects the interest you will have to pay. The more you borrow, the higher your EMI will be. Therefore, students should borrow only what is necessary for their education to avoid a heavy repayment burden.
Interest Rate
Student loan interest rates depend on the type of lender (public or private bank or NBFCs), and the credit history of the borrower. Besides, repayment tenure also ascertains the interest rate calculation on education loans.
Higher interest rates result in higher EMIs because you will be paying more interest on the loan. If possible, try to secure a loan with a lower interest rate.
Loan Tenure
A longer loan tenure reduces your monthly EMI but increases the total amount of interest paid over the life of the loan. A shorter tenure increases the EMI but reduces the total interest burden.
Moratorium Period
Many education loans come with a moratorium period (a grace period during your studies when you do not have to start repaying the loan). The EMI is usually calculated after the moratorium period ends. Some banks may allow interest to accumulate during this period, which could increase the EMI once the repayment period begins.
Also Read: Plan smart repayments by checking out this blog on payment plans for student loans. Understand which repayment plan is the best as per your financial needs.
Advantages of Simple Interest for Education Loans
Simple interest makes it easier for students to plan their finances. The total amount payable is fixed as the interest is only charged on the principal. You can easily calculate the amount you will repay at the end of the loan term.
They typically have a lower interest burden. This is because simple interest is typically lower than compound interest in the long run. For students, this means lower overall interest payments.
Simple interest is also easier to calculate and understand than compound interest, which can sometimes be complex, especially when compounded at different intervals (monthly, quarterly, etc.). Most importantly, for education loans with shorter repayment tenures (5-7 years), simple interest is often more affordable and easier to manage.
This was all about simple interest education loans. Understanding how it is calculated is essential for effective financial planning and management. You can simply use the given formula or utilise available tools such as calculators for more appropriate calculations. This helps you make informed decisions about your educational financing options and minimize financial stress throughout your studies.
To learn more about education loans, the best bank accounts for students, forex, or banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your experience with studying abroad.
FAQs
Yes, most education loans use simple interest for calculating the interest owed. This means that the interest is calculated based solely on the principal amount without compounding.
Simple interest is the interest charged on the principal amount of the education loan, calculated at a fixed rate over a specific period.
Interest on education loans is typically calculated using a simple interest formula, although some loans may employ compound interest. Some lenders calculate interest daily, which can be found by dividing the annual rate by 365.
To calculate simple interest on a student loan, you must know the principal amount, interest rate, and loan tenure. Now, you can use the formula, SI= P x Rx T. For example, if you borrow INR 1,00,000 at a 5% annual interest rate for 3 years, SI = 1,00,000 x 5% x 3= INR 15,000.
The amount of interest charged on education loans varies based on several factors. This includes the amount of money you borrow and the type of lender you choose. The total interest paid will also depend on how long you take to repay it.
Simple interest is calculated only on the principal amount. On the other hand, compound interest is calculated on both the principal and accumulated interest.
Simple interest typically results in a lower interest burden compared to compound interest, as it is charged only on the principal amount.
Yes. Simple interest usually starts accruing from the disbursement of the loan or immediately after the loan is sanctioned.
Once you have calculated the simple interest, you can determine the total repayment amount, which includes both the principal and the interest. You can now calculate the EMI by dividing the total repayment amount by the number of months in the loan tenure.
Several factors influence the simple interest on education loans. These include the borrower’s credit score, loan amount, and loan tenure impacts interest. Whether the loan is secured or unsecured can influence rates too, with secured loans typically having lower rates.
Simple interest provides predictable payments. The total cost is generally lower than compound interest, as it doesn’t accumulate on itself. Transparency is another benefit and you can easily understand how much you owe to the lender without hidden fees. Lastly, they are easier to manage due to their straightforward calculations.
Some lenders allow you to pay the interest during the study period to avoid it being added to the principal, which will help in reducing the total amount you need to repay.
Yes, many countries have government-backed education loan schemes that offer lower interest rates or subsidies.
Interest paid on an education loan is eligible for tax benefits under Section 80E of the Income Tax Act in India, which may reduce your taxable income.
Prepaying the loan reduces the principal amount. This in turn reduces the amount of interest you will pay over the loan term.
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