The Concept of Broken Period Interest: Here’s What You Should Know
A lender sometimes charges a certain amount of interest before the disbursal of a credit line or loan. So, it is charged even before the EMIs begin. This interest is called the gap interest or simply broken period interest. Here is more about this kind of interest that you need to know.
What is Broken Period Interest?
It is levied in the gap between the date of the disbursal of a loan or credit line and the first EMI. This gap is called the indicative broken period. This type of interest is only levied when the time gap is more than 30 days.
Which Part of a Loan or Credit Line is Broken Period Interest Levied? How Much Interest is Charged?
Traditional financial institutions and banks charge a gap interest on the approved loan amount. However, a reputed fintech company charges broken period interest only on the balance on the days beyond the 30-day period.
The rate of gap interest charged by lenders differs from one to another. For example, if you choose a renowned fintech company, you would be charged only 2% interest per 30 days.
How Is Gap Interest Calculated?
Let’s use an example to see how broken period interest is calculated. For instance, you need to pay the EMI of a personal credit line on the 5th of every month. Say the funds have been disbursed on the 1st of February. Then you need to pay the broken period interest on the 5th of February. So it would be charged on five days from the 1st to the 5th of that month.
The gap interest that you pay will not be considered a part of the total outgo of the borrowed credit line or loan. This is because the deduction of your monthly instalments will start from the 5th of March and continue for the whole tenure.
The amount of gap interest is calculated using the formula of 1/12 for the particular month, irrespective of the number of days. A month is always considered equal to 30 days in this calculation.
Conclusion
The broken period interest rate is just one of the things to check when you apply for a personal credit line. There are many other details to check. For instance, check the maximum amount of cash offered under this product. Top fintech companies offer this personal cash reserve up to ₹4,00,000. Under this facility, you can take one personal loan, and multiple Buy Now Pay Later loans to shop at leading online merchants like Amazon and Flipkart without upfront payments. You can repay the whole amount in easy EMIs over a tenure of 1 year. Look for these benefits before applying for a credit line on your Android or iOS device.