Is interest calculated daily or monthly?

Interest can be calculated daily, monthly, quarterly or annually, depending on the terms agreed upon between the financial institution and the borrower.

For most loans, such as home loans, personal loans, or car loans, interest is usually compounded monthly. This means interest is calculated and added to the principal every month based on the outstanding balance. So, if you have a personal loan of Rs 1 lakh at 10% annual interest with monthly rests, the monthly interest will be (10/12) %, which is 0.833% of the outstanding principal balance each month.

For short-term loans like credit cards or some types of business loans, interest may be compounded daily. With daily compounding, the interest accrues each day and is added to the principal daily rather than monthly.

The more frequent the compounding period, the higher the effective annual interest rate, as interest starts earning interest. When taking a loan, verifying if the interest is compounded monthly, quarterly, daily, or annually before signing the agreement is important. This impacts the total interest payable over the loan's tenure.