This is the details I received from the manager of the SBI branch who processed my SBI Maxgain loan.
The interest for the OD account is calculated and debited on 30th of every month and the EMI amount is credited on the pre-agreed date (say 7th of every month).
In my OD account statement, the negative balance in my OD account (outstanding principal) is further reduced by the interest debited as on 30th. And on 7th of every month, after the EMI credit, the balance in my OD account increases.
The outstanding amount for those 7 days is the principal outstanding as on 30th of the previous month + the interest debited on the 30th. Hence for those 7 days I will be paying interest on this outstanding balance, which is not only my outstanding principal amount but also the interest debited on 30th.
For example, for simplicity, if my outstanding principal is Rs.40 lakhs as on April 30, my EMI is Rs.40,000 out of which Rs.34,000 is interest and Rs.6000 is principal.
My OD balance as on April 29th: -40,00,000
Interest for the month (debit): 34,000
My OD balance as on April 30th: -40,34,000
Loan EMI credited on May 7th : 40,000
My OD balance as on May 7th: -39,94,000
Now the interest calculated (on per day basis) and debited on May 31st will consider Rs.39,94,000 as outstanding for 24 days and Rs.40,34,000 as outstanding for 7 days.
1. Is this calculation correct? Why am I paying interest on interest for 7 days? Am I missing something here?
2. The manager says this calculation from SBI is very transparent and SBI follows the methods that are most beneficial to the customer and other banks do much worse.
Can experienced people please clarify?