SBI (State Bank of India) calculates interest on personal loans based on the reducing balance method, also known as the principal reducing method. In this method, interest is charged on the outstanding principal amount of the loan, which reduces with every payment made by the borrower.
Here’s how SBI calculates interest on personal loans using the reducing balance method:
- SBI calculates the interest on a daily or monthly reducing balance, depending on the terms and conditions of the loan agreement.
- The interest rate is applied to the outstanding principal amount of the loan, which is the total amount borrowed minus the amount already repaid.
- The interest component of each monthly repayment is calculated by dividing the annual interest rate by 12 and multiplying it by the outstanding principal amount of the loan.
- The monthly installment paid by the borrower is then allocated towards both the principal and the interest components. The interest component is deducted from the monthly payment, and the remaining amount is used to reduce the outstanding principal amount of the loan.
- As the principal amount reduces with each payment made by the borrower, the interest component of subsequent payments also reduces.
- This process continues until the borrower has repaid the entire loan, including the principal amount and interest.
It’s important to note that the actual interest charged by SBI on personal loans may vary depending on several factors, such as the borrower’s credit score, income level, and the loan amount and tenure.