What is IRR? How to calculate the exact interest paid to banks? There are plenty of doubts regarding the IRR (Internal Rate of Return) or Interest paid on Loan. This article will help you know more about it and by the end of this article, you will also be knowing a shortcut, which will help you in calculating the Simple Interest you paid on your loan. So hold it tight!


What is IRR? or Rate of Interest paid on Loan?

There is always confusion between the IRR (Internal Rate of Return) or Interest Rate paid on loan, there are very few terms which have been used to explain Interest, IRR is one of them. Actually, any Financial Institute or Bank lending money to their borrowers, on behalf of lending money, they charge certain % of interest and that is called IRR in any Banking or Financial Institute. They charge Interest for giving money on credit for some specific tenure. Such Institutes or Banks have to maintain their IRR (Internal Rate of Return) as to be profitable  through lending loans. We as a borrower, use the term 'Interest' we pay on loan but it is in real sense is a "Reducing Rate of Interest" .

There is always confusion in calculating the Rate of Interest which a Bank or a Financial Institute have been charging. So for that, there is a shortcut which will help you calculate the exact % of Simple Interest being paid yearly. IRR is a rate, which a Bank or a Financial Institute has to maintain for their own viability and that is the sign of their profitability too. Higher the IRR charged on Borrower, Higher the profit margins will be for a Bank or an Institute. IRR is calculated by considering risk, factors affecting or future loss and after assessing the viability. Banks or Institutes will decide their Break Even Point in terms of % where, they will decide their minimum Rate of Interest to be charged on borrower.  Banks or Financial Institutes will lend money above the Break Even Point. If they lend money lower to their required IRR, it will result in loss for them. Suppose the required IRR for a Bank or Institute to maintain is 10% and so that Bank or Institution can lend money above 10% to one borrower or even they can levy 8% to other borrower but in long run the average rate of interest levied should be greater than the 10% otherwise their profit will result in to loss. There is significant importance of calculating IRR in financial terms but the usage of IRR in lending money is different with that, so it is beneficial for you to use below method of calculating IRR for knowing the rate of Interest charged on Loans only.


Calculate Flat Interest from IRR

It is all confusing for people from Non-Financial Background and there are chances that above described meaning of IRR might not be easy for them to understand but don't worry, as there is one shortcut, which will  help you in calculating IRR within few seconds. So here is the magic,





You can simply divide the Rate of Interest you have been told to be charged while taking loan with 1.8 and there you go! the answer will be converted into Simple Interest or Flat Interest paid for one year on loan. It is as easy as preparing Maggie! So try it with your Rate of Interest on which you borrowed loan.
Tips:

         Ã˜  Divide your Rate of Interest by 1.8 to know your yearly Flat Interest.
           Ã˜  Personal Loans are easily available at 12%-16% IRR.
           Ã˜  Loan should be taken only if you’re not in need of Money