Do you know what a broken period interest in a personal loan is?
Let me explain with an example:
Ram got a loan on April 25th. He has asked for the next EMI date: June 5th. Other EMI dates will be common, such as July 5th, August 5th, and so on.
Usually, interest is calculated on a monthly basis. For the first month alone, the interest is calculated for:
1) The 5 remaining days in April (April 25th-30th)
2) The 5 days in May (May 1st-5th)
3) All 30 days in June
4) Total interest applicable – 40 days
Here, the first 2 options are considered as the ‘broken period,’ which amounts to 10 days.
A broken period interest is a certain interest that financial institutions charge before the actual EMIs start when the gap between the actual date of disbursal and the first installment is more than 30 days.
A lender can collect the broken period interest in multiple ways:
1) Upfront, collected at the time of disbursement.
2) As an installment at the end of the broken period. In our example, the lender will not wait until June 5th, as they expect the interest amount to be collected on May 5th itself.
3) In addition to the EMI, along with the first EMI on June 5th (Normal EMI + $1000 for broken interest).
4) Adjusted in the first EMI, reducing only the broken period interest in the normal EMI. Here, the principal will not be reduced, which is beneficial to the lender.
What’s your view on this?