How do I calculate daily interest on a loan?

It is a fact that when you take out a loan, you will have to pay that money back with interest. This is why you must pay a higher amount when returning the money. Generally, loans work on an interest basis that is calculated monthly or yearly. But, a daily interest loan works differently. 

A daily simple interest loan (DSI) is the type of loan on which interest is accrued daily. Although, in this type of loan, the lender calculates the interest only on the current unpaid principal, and the payment is divided between the interest owed and the principal balance. Every time you, as a borrower, pay back the money, the interest charges will be less than the previous payment. This is why it is always in your favour to calculate the daily interest on a loan beforehand. 

The easy availability of lending mechanisms all across the country has rendered us unable to go into the depths of debt. But as an informed borrower, you should always check on several niche aspects of getting a loan, such as the daily interest you have to pay on your DSI type of loan. It is essential to do that because these things can affect your daily income, CIBIL score, and creditworthiness. They directly impact your capacity to borrow money in the future. 

How to calculate daily interest on a loan?

It is an established principle of loan management that paying on time always increases your capacity to borrow in the future. Establishing goodwill with your lender always goes in your favour in the long term. But, apart from that, it is also crucial to pay back smartly.

Let’s see how the daily interest loan works in that segment.

Let’s take an example of a 24-month, ₹10,00,000 loan with an 8.5% interest rate per annum, which would mean the daily interest would be around ₹233 per day.

₹10,00,000 x (8.5% interest/365 days) = ₹232.87 R/o to ₹233.

For 31 days, your interest will amount to ₹7223/ month.

₹233 x 31 = ₹7223.

So, the day the first monthly payment of ₹41,666 is due, the amount of ₹7223 will go towards the interest of the loan, and the remaining ₹34,443 will go towards the primary balance.

So the new principal balance will be ₹9,65,557/-

One of the perks of having a daily interest loan is that if you make payments on time, the amount you owe goes down. Thus, the interest you will owe will decrease next time because the principal amount has been reduced.

Let’s see how.

Next month, you have 31 days. So, the daily interest on ₹9,65,557/- will be:

₹9,65,557/-x (8.5% interest/365) = ₹224.85 daily interest

₹224.85 daily interest x 31 days = ₹6971 monthly interest

New principal balance: ₹9,58,586.

Thus, the principal amount will continue to decrease every time you make the payment.

How does this work?

• The payments you make will cover the interest you owe to the lender, directly reducing the principal amount each month. Thus, significantly and systematically reducing the burden each month.  
• You will not be charged late fees because you will pay the amount on the due dates. This will be possible if you calculate the daily interest on a loan beforehand and know the amount you will owe each time. 
• The interest you will be paying will reduce simultaneously, thus reducing your burden in that aspect. Additionally, your loan will be paid at the proper time, establishing a good credit score and helping you secure loans more quickly in the future.  

There are a few things to keep in mind while taking out a DSI 

1. If you pay late for DSI, it is unfavourable for you. The reason is that when you make late payments, it will also mean that you will have to pay more interest even though your late payment is accepted during the grace period and you didn’t have to pay any late fees. Yet, the daily interest you are paying will keep increasing because the interest on this type of loan accrues daily. Plus, late payments reduce your CIBIL score.

2. Similarly, if you repay a substantial portion of the principal amount at one time because you come across some money. Then, you can calculate daily interest on a loan only on the remaining principal amount. For example – if you take a loan of ₹10,00,000/- and you pay back ₹5,00,000/- in a single payment, then the interest for the next month will be calculated only on ₹5,00,000/- and the original principal amount of ₹10,00,000/-.

Conclusion 

Taking out a DSI loan requires you to calculate the daily interest on the loan properly. You should always consider the monthly amount you will have to pay and substantiate it with the income you will accrue. Daily interest loans are among the best types of loans because of their benefits in terms of interest rate calculation. But you should always be disciplined in terms of repaying the money. Otherwise, it will be unfavourable for you. Nobody wants to pay high interest on their loans because it will affect their income. This is why daily-interest loans are the best.

The daily interest loans that Piramal Finance gives are given at lower rates than the general market, which is to cater to every need of our customers.