What Is Cumulative Interest?

Cumulative interest is the total of all interest payments made on a loan during a specific period. Borrowers need to understand what is cumulative interest as it is an important part of understanding how much goes into paying back a loan. When investments are made or loans are taken, there is accrued interest on the amount. The interest growth in investments is due to compounding, and in loans, interest rates are calculated as a proportion of payments made on the principal. This interest accumulation can represent the total gains or costs involved. It is important to consider the total interest when borrowers decide on a loan amount as they can judge their repayment ability better.

Borrowers can sometimes identify the most cost-effective loan by calculating the cumulative interest. However, other significant elements like the initial loan fees are not included in cumulative earnings alone.

How Is Cumulative Interest Calculated on a Personal Loan?

It is important to understand what is cumulative interest and how to calculate it for personal loans. There are different ways to arrive at the interest total and it can vary depending on the lender. There are 2 main methods: reducing balance and flat interest rate method. 

The flat interest rate method of calculating interest takes a constant rate during the loan. At the start of the loan term, the interest is computed for the entire loan amount. 

In the reducing balance method, the amount of principal owed at the end of a specific period is used to arrive at the interest rate on the personal loan. 

A key difference is that the principal balance still owed is used, instead of the initial amount, as the basis for the next interest calculation. Borrowers should enquire about the lender’s method of calculating cumulative interest to understand how it affects the repayment amount and terms. 

Example of Cumulative Interest on Personal Loan

Calculating the cumulative interest is an important part of understanding the total cost of borrowing. This interest sum may not include any additional charges or fees required by the lender, therefore, it is important to take those into account separately. 

This is how you can calculate the cumulative interest using the flat interest rate method. We can assume a personal loan of INR 1,00,000 and take a flat interest rate of 12% per annum on a loan that lasts for 3 years. The aggregate interest formula is used, which is, 

Total interest = P*r*t,

Where,

• P is the principal amount.
• r is the rate of interest,
• and t is time.

This will be calculated as: 

Total interest= 1,00,000*0.12*3.

By doing this, you can find the total interest to be INR 36,000. This shows borrowers how much interest they would have to pay over the principal amount of INR 1,00,000. A simpler way to calculate interest is through an EMI calculator. 

Conclusion

Overall, understanding the methods of calculating cumulative interest is important when taking out a loan. This can help borrowers aggregate interest payments to plan their repayment schedule more effectively. Inquiring about cumulative interest methods is key to making more informed decisions and increasing financial knowledge. 

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