Loans have become one of the most crucial aspects of our lives in the modern day. Since monetary assistance is needed anywhere and at any time, loans become saviors when the requisite amount is not present at hand.
When it comes to purchasing a house or car or simply funding education for the children, loans can be taken. It appears that everyone uses loans for at least accomplishing one or two of their life goals.
When it comes to any loan, one of the most closely related terms that you surely have heard is EMI. The monthly payment amounts you submit to pay for the loan obtained from the banks, NBFCs, or any other financial institutions are EMI, an abbreviated version of an equated monthly installment.
If a borrower fails to make an EMI payment, the bank or the concerned financial entity will assess a penalty fee. A late or missing installment payment will be shown on your credit record.
Failure to make loan payments on time might have a negative impact on your credit score. Overall, failure to cater to timely EMI repayments leads to an overall negative impact on the borrower’s creditworthiness.
Calculating the EMI amount might be challenging at times. This article will enable you to learn how to calculate EMI to make things easier.
On what factors do EMI depend upon?
Three primary factors determine the EMI of every loan:
- Loan amount -This refers to the amount of money you have borrowed from the financial organization as a loan.
- Loan Tenure – The loan tenure refers to the agreed-upon time frame for loan repayment between the time of borrowing and payback as arranged between the borrower and the lender. The loan tenure could be agreed upon depending on the payable – a lumpsum or an EMI.
- Interest rate-This is the rate of interest imposed on the amount of money borrowed from banks.
What is the formula for calculating EMI?
By employing a mathematical formula
If you are attempting to calculate the EMI of your loan, it is critical that you understand the calculation formula.
The mathematical formula for EMI calculation
EMI = P × r × (1 + r)^n/((1 + r)^n – 1)
Where P=loan amount, n=loan payback period in months, and r=interest rate
Let’s look at an example.
If Ramesh takes a loan of Rs 1 lakh from the bank at a rate of interest of 10% and the loan term is 12 months, the EMI will be 100000*0.1 (1 + 0.1)^12/((1 + 0.1)^12 – 1) = Rs 8792.
So, based on the calculation, you can see that the loan amount of EMI is proportional to the loan amount borrowed from the bank authorities. The bigger the loan amount, the more the monthly EMIs you must pay. In the case of a loan, while the total interest to be paid grows with the loan tenure, the EMI payments decrease with the loan duration.
By using an Excel spreadsheet
If you desire to make things easier, use an Excel spreadsheet. However, remember that the function accessible in excel for EMI computation is PMT, not EMI.
You have to utilize three (compulsory) variables for the rate of interest, the initial loan amount, and the loan tenure.
Now, the terms can be written as the rate of interest (rate), number of periods (nper), and, finally, the loan value or present value (pv) for the same.
In Excel, you can use the formula: = PMT (rate,nper,pv)
Another error everyone makes is that if your interest rate is 10%, you must calculate it as 10/100=0.1. The interest rate should be your monthly rate. You will see that the consequence will be a red color indication of the cash outflow for the borrowers.
Let’s take an example to demonstrate the calculation. Assume you are paying a quarterly installment on a Rs 10 lakh loan with a yearly interest rate of 10% for 20 years. To calculate the 12-month rate in this situation, divide the rate by four and double the years by four. According to the provided statistics, the equivalent quarterly payment is =PMT(10%/4, 20*4, 10,000,000).
Using the EMI calculators that are accessible online
There are now so many EMI calculators available online that you can use to calculate the payment amounts. They are simple to use and have outstanding functionality. You need to provide basic information about the loan to determine the EMI amount.
- You must provide the loan type as well as the amount borrowed in the loan.
- You must enter the loan tenure, the period you have borrowed the loan amount for.
- Make sure you input the interest rate.
- Sometimes, you may also be required to input the prepayment amount if you make one.
After inputting all of these parameters, you can press the compute/calculate button to calculate the EMI amount.
The amount displayed on the EMI calculator and the actual amount you need to submit might vary slightly. After the bank approves the amount and duration of the EMI, the precise installment that you will have to pay may fluctuate significantly since factors like interest rates and processing fees may differ slightly from what you used to calculate the due amount.
What are Varied EMI Payments?
Another crucial component plays a role in the EMI’s calculation. This essential factor is the type of interest that is charged on loan. Check to see if your EMI has a fixed interest rate or a floating rate of interest.
The EMI payments will be fixed for the loan duration in fixed-rate loans. It will not depend on the profits or losses of the market trends. However, in the case of variable rate loans, interest rates vary according to market rates. As a result, the EMI payment amounts vary with the change in the base rates.
Another element influencing EMI payments is pre-closure or partial payments made on loans. Any partial payments made on loan are subtracted from the loan’s principal amount. This reduces the overall amount of interest that must be paid.
However, keep in mind that pre-closing your loan before it has finished its term might harm your credit score. Paying your bills on time might help you boost your credit score. As a result, choose to prepay a portion of your loan (rather than the entire amount) and shorten the loan term to save money on interest payments. Banks impose a penalty fee for early repayment.
In most cases, a person making a partial payment would be given the choice of keeping the tenure or the EMI constant. The monthly EMI payments will be decreased if the tenure is kept constant. Similarly, if one chooses to keep the EMI constant, the loan’s term will be lowered.
What is a loan amortization schedule?
A loan amortization schedule is a precise tabular depiction of the loan that includes the EMI payment. It is instrumental and informative since it reveals the breakdown of an EMI payment’s interest and principal components.
This schedule allows the investor to check how the loan is being paid and how much money is still owed. It comprises information such as the payment duration, EMI, interest, principal payment, and the outstanding loan if the loan holder wishes to foreclose or renegotiate the debt.
You can check out Money View loan EMI calculators which help you stay on track with your loan repayments and constantly monitor your financial bearings, etc. The calculations of all these EMI calculators are highly accurate.
Apart from these, they also provide personal loans to help with financial emergencies. You may apply for this personal loan at any time of year because it does not have a set validity term. Furthermore, loan distribution is a quick and painless process that does not necessitate your in-person presence or the submission of essential documents.
You must have known how to determine your loan’s EMI by now. If you enjoy math, try doing the calculations yourself. Otherwise, you may use the excel spreadsheet or the EMI calculators.
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