How Loan Interest Works in India - Simple vs Compound Interest
Published on May 4, 2026
Understanding how loan interest works is crucial for making informed borrowing decisions in India. Banks use different methods to calculate interest, and the method used significantly impacts your total repayment amount.
Types of Interest Calculation
There are two main types of interest calculations used in loans:
- Simple Interest: Interest is calculated only on the principal amount
- Compound Interest: Interest is calculated on both principal and accumulated interest
Simple Interest Formula
Simple Interest = P × R × T / 100
Where:
P = Principal amount
R = Rate of interest
T = Time period
Compound Interest Formula
Compound Interest = P × (1 + R/100)^T - P
This is the formula used for most loans in India, including home loans, car loans, and personal loans.
How Banks Calculate EMI
Most loans in India use compound interest for EMI calculations. The EMI formula combines both principal and compound interest components.
EMI Formula:
EMI = P × r × (1+r)^n / ((1+r)^n - 1)
Where:
P = Principal loan amount
r = Monthly interest rate
n = Number of monthly installments
Simple vs Compound Interest Comparison
| Type | How It Works | Common Use |
|---|---|---|
| Simple Interest | Interest is calculated only on the original principal | Basic examples and some short-term calculations |
| Compound Interest | Interest is charged on principal plus accumulated interest | Most home, car, and personal loan structures |
| EMI Loans | Repayment includes both interest and principal every month | Standard retail loan repayment in India |
Use Our Calculators
Calculate your loan interest and EMI with our free calculators: