Interest on education loan is calculated in two parts. If you keep paying your interest from the very first month, then the interest would be calculated as Simple Interest. However, if you choose not to pay interest every month then interest will be calculated as compounded interest.
Part-1:- During the moratorium period….
During moratorium period, simple interest is calculated as and when amounts are disbursed to you and not on the entire loan amount at once using the simple formula:-
Where, SI= Simple Interest
P= Principal amount
R= Rate of Interest, per annum
T= Time period in days
Now, let’s see the concept of moratorium period-
Moratorium period refers to the holiday period during which the borrower is not required to make any repayment of loan. However, interest starts to accrue on the outstanding amount of the loan. It starts as soon as the loan is disbursed. For education loan the moratorium period is 12 months after completion of studies or 6 months after getting a job, whichever is earlier.
The following example will help us to understand the calculation better:-
You got an education loan of ₹ 5 lakhs for a tenure of 15 years with an interest rate of 10.85% per annum. It means your moratorium period will be 5 years + 12 months, which is equal to 6 years or 72 months, in case of your unemployment after course completion. If you have secured employment, in that case, your moratorium period will be 5 years + 6 months after securing the job, which makes a total of 66 months.
On 1st July 2017, you requested the bank to disburse the first installment of education loan of ₹ 1 Lakh on which the bank will start charging interest as soon as the amount is debited to your loan account. The interest you need to pay to the bank on Aug 1 will be calculated using the above formula as under:-
P= ₹ 1,00,000
T= 30 days
Therefore, SI= ₹ (1,00,000* 10.85* 30)/36500
= ₹ 892.00
If you do not pay this interest amount on Aug 1, 2017, then after that, your principal amount would become Rs.100892.00 (by adding the interest for July month), and interest for Aug month will be calculated on this principal. But if you keep paying your monthly interest every month, in that case, your principal amount should remain same, that is ₹ 1.00 lakh.
Part-2:- When repayment starts….
For instance, you kept repaying interest in every month during your moratorium period. So, when your repayment started, your outstanding balance of loan remained ₹ 5lakhs, On this principal, compound interest will be calculated for 15 years @ 10.85% pa to convert the total amount of Principal & Interest both, into monthly EMI, which is a fixed amount and can’t be changed. So, now the amount which you will be paying as EMI every month, will be calculated using below mentioned formula:
EMI= P*(1 +R/100)^N
Where, P=Principal amount, that is the total outstanding
R=Rate of Interest
It is a bit difficult to calculate EMI manually by using this formula. To get the exact result, it is better to calculate the same using EMI calculator.
You need to follow these three simple steps for calculating Education Loan EMI using EMI calculator:-
Step-1:- Enter the principal amount of the loan in the first section which is ₹ 5 lakhs in the above case.
Step-2:- In the next section, you need to enter the interest rate offered to you which is 10.85% in the above case.
Step-3:- In the last section, you will have to enter the tenure of the loan which is 15 years in the above case.
And that’s it. You will get the EMI which you are liable to pay for the above combination of Principal, rate of interest and tenure. You can also change the above factors according to your need and see the changes in the EMI.
Note:- Banks also ask for additional processing fee which is as low as 1% of the principal amount. However, the results obtained in the above case do not take the processing fees into account.
The illustration of these steps is shown below:-
The EMI calculator gives us the following summary:-
The amortization details of your loan is described below:-
The following graph illustrates the amortization details better:-