## Is Home Loan Simple or Compound Interest?

Question

1. Home loan interest rates are calculated in two ways-through simple interest and compound interest. For a long time, I had the query: is home loan simple or compound interest in India, but now I know the answer and also their differences as well. The formula to calculate the interest is also different for both of these but easy. Once you understand the definition of these two, you can figure out the differences yourself.

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What is a simple interest loan?

A simple interest loan is a loan where the interest rate is calculated on the basis of the principal amount that is borrowed. There is a formula to calculate it and that is-

simple interest = principal amount x rate of interest x loan tenure

Now let’s take for example that the

Principal amount= 50,000

Simple interest= 8%

Loan Tenure= 1

Then you will have to pay Rs 4,000 as interest and the overall payment amount will be Rs 54,000

What is a compound interest loan?

A compound interest loan is a loan where the interest rate is calculated based on the principal amount plus the accumulated interest of the previous periods. The formula to calculate compound interest is

a = p(1+r/n)nt

a= amount

P = principal balance

r= interest rate

n= number of times that interest compounds per year

t= tenure of the loan

What is the difference between simple interest and compound interest?

In simple interest, the interest is accrued on the principal amount borrowed or invested whereas, in compound interest, the interest is accrued on the principal amount plus the accumulated interest of the previous periods.

Home loan interest rate is compound interest and not simple interest as you pay interest on the principal amount plus the interest accrued.

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