What is Principal Amount and Interest? Know how to calculate

The principal amount, interest rate and tenure are the key loan terms determining your total repayment amount. Given this, it’s crucial to calculate the impact of these factors to determine if the loan fits your budget.

Calculating total interest payable depends on the interest rate and the tenure and is a simple calculation. Doing these calculations before finalising your loan also enables you to negotiate for better terms and save more in the long term.

Read on to learn how to calculate principal amount and interest with some examples and tips to reduce your total interest payable.   

What is Principal and Interest in a Loan? 

A principal is the sum of money you borrow from your lender. Similarly, interest is the cost of borrowing, which lenders charge for extending their services and is a percentage of the principal. These numbers form the core factors for calculating your interest and EMI amount.  

When you apply for a loan, the lender offers you an interest rate based on your eligibility, which dictates your borrowing costs. You can calculate your monthly loan instalment with the formula: 

EMI = [P X R X (1+R) ^N]/[(1+R) ^N-1]

Where: 

• P = Principal 
• R = Annual interest rate
• N = Total tenure

While manual calculations can get cumbersome, using an online personal loan EMI calculator is ideal to get instant and accurate results. Note that each EMI payment goes toward clearing the loan principal and interest charged.

The Formula for Principal and Interest 

The interest is computed based on your outstanding loan amount. The Annual Percentage Rate (APR) implies the annual cost of your loan. It includes various other costs, such as:

• Processing charges
• Administrative fees
• Insurance premiums, etc.

Therefore, you can calculate the interest paid for the first month with the formula: 

Interest Repayment = Principal Loan Amount X Annual Percentage Rate /12

After calculating the interest, you must subtract this sum from the EMI to calculate the principal amount paid. Thus, the principal amount formula is: 

Principal Repayment = EMI – Interest Repayment 

This Principal Repayment is then subtracted from the opening loan principal to calculate the outstanding principal: 

Outstanding Principal = Opening Loan Amount – Principal Repayment

Thereafter, you can calculate next month’s interest repayment amount using this outstanding principal. Following steps until the end of tenure will create an amortisation schedule. 

Also Read: How to calculate EMI in Excel?

Principal and Interest Calculations

Here’s an example to better understand the process of calculating the principal amount and interest. Say you take a personal loan of ₹25,000 and your interest rate is 16% p.a. for a tenure of 12 months. Then: 

• P = ₹25,000
• R = 16%/ 12 or 1.3% per month 
• N = 12 months 

So, EMI = [P X R X (1+R) ^N]/[(1+R) ^N-1] = ₹2,268

EMI = ₹2,268

Now, the principal amount will attract interest as such: 

Interest Repayment = Principal Loan Amount X Annual Percentage Rate /12

Interest Repayment = ₹333.33

To calculate the principal paid in the first month: 

Principal Repayment = EMI – Interest Repayment 

Principal Repayment = ₹2,268 – ₹333.33 

Principal Repayment = ₹1,934.67

To calculate the outstanding balance: 

Outstanding Principal = Opening Loan Amount – Principal Repayment

Outstanding Principal = ₹25,000 – ₹1934.67

Outstanding Principal = ₹23,065.33

Using this outstanding balance, we calculate the interest for the next month and so on. 

How to Reduce Your Interest Burden 

Since a high interest rate can affect your total repayable amount and your EMI, you must opt for the lowest interest option to save more. Here are a few steps you can follow for doing so: 

• Improve your credit score before applying
• Choose a longer tenure option to lower your interest 
• Negotiate with your lender for better loan terms
• Lower your credit utilisation ratio 
• Opt for prepayment and foreclosure options based on the amortisation schedule

Note that these terms depend highly on your eligibility and credit behaviour. A high credit score and good repayment history result in lenders offering loans at an attractive interest rate. 

With the Fibe Instant cash Loan, you can easily get an amount of ₹5 lakhs at a nominal interest rate starting from 2% p.m. with quick disbursal. You can also choose from a flexible tenure range of up to 36 months. Download the Personal Loan App on the Google Play Store or App Store, or visit our website to apply now!

FAQs on Principal and Interest Calculation 

How do you find the principal amount?

The principal amount is the amount of loan applied by an individual or a business entity. You can find it in the loan agreement provided by the lender. 

What is the principal formula in Excel?

The formula for calculating principal in Excel is: 

=PPMT (rate, period, number_of_periods, present_value)

In the formula, 

• Rate is the interest rate
• Period is the total tenure
• Number_of_periods is the number of months in a year 
• Present_value is monthly EMIs

What is the principal amount on a loan?

The principal amount on the loan is the sanctioned value credited to your bank account by the lender. So, if you apply for a ₹5 lakhs loan, this amount is your principal amount.