Understanding Housing Loan Simple Interest Calculators for Bank Employees
Introduction to Simple Interest and Compound Interest
Both simple interest and compound interest are methods used to calculate the interest on a loan. While everyone learns about simple interest and compound interest in primary school, it's worth revisiting the key differences between the two.Simple interest is calculated on the original principal amount throughout the loan period. This method is straightforward, as the interest rate is applied to the initial borrowed amount each period, without any additional interest being charged based on any accrued interest.
In contrast, compound interest is calculated on the initial principal and also on the accumulated interest of previous periods. This means that the loan amount, or principal, increases over time as interest is added, leading to higher overall interest payments.
Simple Interest for Housing Loans to Bank Employees
Banks often offer home loans to their employees at simple interest rates, typically 1-2 percent lower than the public rate of interest. Unlike compound interest loans, where interest is added to the principal, simple interest loans ensure that payments are more predictable and straightforward.The interest in a simple interest loan is not combined with the loan amount; it is recorded separately. The loan amount is first adjusted by subtracting monthly installments, and then interest is calculated on the adjusted balance.
How Simple Interest Works in Housing Loans
In a simple interest loan for housing, there are two separate accounts: one for the principal and one for interest. Each month, the entire monthly installment is applied to the principal account, and the interest is calculated on the adjusted principal balance, which is then transferred to the interest account.When the principal amount is fully recovered, any remaining monthly installments are then credited to the interest account. This is in stark contrast to compound interest loans, where interest is calculated on a larger and growing principal amount, leading to a higher monthly EMI (Equated Monthly Installment).
Calculations and Examples
Let's consider an example to illustrate this. If Ramachandra Shenois takes out a housing loan of ?3,000,000 for a 30-year term at a simple interest rate, here's how the loan would be structured:Monthly Installment: Calculate the monthly installment by dividing the total loan amount by the number of months (360 months for 30 years).
Interest Account: For each month, the interest is calculated on the remaining principal balance, and this interest amount is credited to the interest account.
Principal Account: The remainder of the monthly installment, after the interest has been credited, is applied to reducing the principal balance.
When the principal balance reaches zero, all subsequent monthly installments go entirely to the interest account.