Before you apply for a loan through a financial institution such as a bank or financing company, it's a good idea to know how much interest rates are offered and how to calculate the interest on the loan. If you know how to calculate loan interest properly and correctly, you can more easily compare the advantages and disadvantages of these financing and loan products. This time, the BFI Finance team provided an understanding of the types of interest rates on the market and the formula for calculating good and correct loan interest. Come on, see the full review below.
Types and How to Calculate Loan Interest Properly and Correctly
Before getting too far into knowing how to calculate the correct loan interest, it's good to know the types of interest rates that are distinguished by the nature of their changes during the tenor and the nature or method of calculation.
Based on the nature of the changes during the tenor, interest rates are divided into two, namely:
Based on the Nature of the Changes during the Tenor
1. Fixed Interest (Fixed Rate)
Fixed interest or fixed rate is an interest rate that does not change (fixed) during the current credit period. An example of how to calculate fixed loan interest is, if a bank or finance company provides a fixed interest rate of 12% per year during the installment period, the interest to be paid per month is the same every month at 1%. The advantage of fixed interest rates is that you don't have to worry about increasing interest rates in the future. However, if the interest rate on the market decreases, you must still pay installments at a fixed rate even though the percentage is higher.
Examples of loans that apply fixed interest rates are Home Ownership Loans (KPR), Unsecured Loans (KTA), and several types of short-term loans.
2. Floating Interest (Floating Rate)
A floating interest or floating rate is an interest rate that can change periodically following the development of interest rates in the market during the current credit period. The change period follows the agreement in the financing or loan agreement.
If the interest rates in the market rise, the loan interest will also rise. On the other hand, if interest rates in the market fall, loan interest rates will fall. The advantage of this type of loan interest is that you don't have to worry about the risk of interest being too high or low compared to market interest rates. Examples of loans that set a floating rate are Home Ownership Loans (KPR), business capital loans, and other long-term loans.
Meanwhile, the types of interest rates if distinguished from the nature or method of calculation are as follows:
Based on the Nature/How to Calculate
1. Effective Interest (Effective Rate)
How to calculate loan interest when viewed from the nature of the first calculation is to use the calculation of effective interest. The effective interest rate is the interest rate charged from the remaining principal of the existing debt so that the proportion of interest in installments decreases. Effective interest is generally used in long-term loans such as Home Ownership Loans (KPR).
The following is an example of calculating the effective interest rate:
Formula = Remaining Principal Loan Previous Month x Interest Rate per Year x (30 days / 360 days)
An example of the calculation is if you apply for a loan with a BPKB Mobil guarantee of Rp. 60,000,000 with an annual interest rate of 12% and a tenor of 12 months. The amount of interest that must be paid every month is:
Loan principal per month = IDR 60,000,000 / 12 = IDR 5,000,000
1st month interest = (Rp 60,000,000 – (1-1) x Rp 5,000,000) x 12% / 12 = Rp 600,000
1st month installment = IDR 5,000,000 + IDR 600,000 = IDR 5,600,000
2nd month interest = (Rp 60,000,000 – (2-1) x Rp 5,000,000) x 12% / 12 = Rp 550,000
2nd month installment = IDR 5,000,000 + IDR 550,000 = IDR 5,550,000
And then until the 12th month = (Rp 60,000,000 – (12-1) x Rp 5,000,000) x 12% / 12 = Rp 50,000
12th month installment = IDR 5,000,000 + IDR 50,000 = IDR 5,050,000
2. Flat Interest (Flat Rate)
Next, how to calculate the second loan interest using a flat interest rate calculation. The flat interest rate is the conversion of the effective interest rate for the same tenor. The calculation of flat interest is assumed to be the same every month during the tenor, which is calculated from the initial principal so it is assumed that the amount of interest paid for each installment is the same. This type of loan interest is generally used in short-term loans such as Unsecured and Collateralized Loans.
An example of calculating the flat interest rate is as follows:
The formula for calculating the amount of fixed loan interest is:
Interest = Loan Principal x Loan Tenor x Interest Rate per Year
With the same principal amount as the example above, the interest and monthly installments to be paid are:
Loan principal per month = IDR 60,000,000: 12 months = IDR 5,000,000
Interest per year = IDR 60,000,000 x 12% = IDR 7,200,000
Interest per month = IDR 7,200,000 : 12 = IDR 600,000
So, the amount of installments per month to be paid is IDR 5,000,000 + IDR 600,000 = IDR 5,600,000
Such is the understanding of how to calculate loan interest. Through the following article, we hope that you will have a deeper picture of calculating the amount of loan interest before applying for a loan to financial institutions such as banks or financing companies. Well, for BFI friends wherever you are, in the context of BFI Finance's 40th Anniversary in April, don't miss the loan application promo through BFI Finance with the guarantee of BPKB Cars, Motorcycles, and Home Certificates! Get cashback of up to IDR 40,000,000 for every loan application through the BFI Finance website! This promo runs from April 1 to April 30, 2022. You can apply for a loan for business capital, investment, or consumptive purposes. So, let's submit your financing immediately through BFI Finance!
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