Did you know you might be paying interest on a loan before your first official payment is due? This unexpected cost is called broken period interest. Read on to know what this type of interest is, how it applies to a Personal Loan, and how to avoid any surprises when taking out a loan.
What is Broken Period Interest?
Broken period interest refers to the interest charged on a loan if the gap between the loan disbursal time and the due date of your first regular instalment (EMI) is more.
Financial institutions calculate the broken period interest due based on the total time you have on the loan. Since the interest accumulates from the day you get the funds credited to your account, a gap between disbursement and the first payment creates a "broken period". This does not fit a typical instalment structure, which is why lenders charge this type of interest.
Examples of Broken Period Interest
A Personal Loan is a common example where broken period interest usually applies. Let us say you get approved for a Personal Loan of Rs. 1,00,000 on April 1st, but your first payment is not due until May 1st. If the loan has a 10% annual percentage rate (APR), you will accrue interest for the 30 days between disbursement and the first payment.
Here is a breakdown of the calculation of the broken period interest calculator:
Monthly interest rate= APR / 365 days x 30
Monthly interest rate for 10% APR= 10% / 365 x 30 = 0.82%
Interest for 30 days= Rs. 1,00,000 (loan amount) x 0.82% = Rs. 820
Therefore, in this scenario, you would owe Rs. 820 in broken period interest along with your first regular payment on May 1st.
How Can a Lender Collect Broken Period Interest?
There are a few ways lenders might collect broken period interest:
1. Upfront: The lender deducts this interest from the disbursed loan amount. In the example above, you might only receive Rs. 99,180 instead of the full Rs. 1,00,000.
2. Added to the First Payment: The broken period interest is added to your first regular instalment. In our example, your first payment on May 1st would be Rs. 820 (broken period interest) + your monthly payment amount.
3. Separate Instalment: The lender might issue a separate instalment for the interest before your first regular payment is due.
4. Adjusted with the First EMI: The lender will adjust the interest amount in your first EMI. It will not affect your total loan amount, and you will receive the total loan amount you applied for.
To Conclude
Understanding broken period interest can help you make informed decisions when taking out a loan. By being aware of this cost, you can factor it into your budget and avoid any surprises while paying your first EMI. Talk to your lender to know if you need to pay this interest and the exact amount.
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