Equated monthly instalments, commonly known as EMIs, can easily be termed as omnipresent. A fixed monthly income, rising inflation and increasing cost of living have made it inevitable to opt for credit. Although, getting a loan has become easier, once its approved and disbursed, a new component finds a place in your life – EMIs.
Understanding EMIs
Since, it’s such an important part of taking a Personal loan, you must also know how EMIs are calculated. When you approach lenders, they check your eligibility for Personal loan and provide you with the loan details, along with an amortization table and EMI amount. More often than not, borrowers ignore how the EMI is calculated because it seems confusing. At times like this, ignorance is not bliss. To know your EMI you can use EMI calculator, it will help you to take decisions regarding prepayment, foreclosure and also avail right tax benefits.
Decoding EMIs
Every EMI consists of an interest component and a principal component. But they are not present in equal proportion. For instance, if your EMI is Rs. 36,580, it does not mean you are paying Rs. 18,290 each towards interest and principal. In fact, when you begin repayment, the interest component is higher which continues to reduce. On the other hand, you pay lesser principal at the beginning of loan cycle which increases as years pass by.
loan Amortization Table
In simple words, the table gives a breakup of your loan repayment tenure. It includes columns for outstanding principal, the interest on outstanding principal, principal paid and the EMI amount. At one glance you can see how much interest you would have paid at any given point in the tenure. This schedule can help you plan to foreclose your loan or transfer it.
Factors Influencing EMIs
EMIs on a Personal loan depend on three factors: principal, Personal loan interest rate and tenor.
Principal is the total borrowed amount, which largely impacts the EMI. The loan amount is directly proportional to EMI. Thus, as principal increases, EMI goes up too.
The interest rate is the cost of borrowing money from the lender. lenders determine the rate of interest based on your credit score, income and repayment capability. Depending on whether you choose fixed or floating interest rate, the EMI will vary. However, the EMI remains directly proportional to the interest rate. EMI stays constant, if you choose a fixed interest rate. In case of a floating interest rate, EMI will keep changing as interest rate fluctuates.
Find Out How Your Credit Score Impacts Your Personal loan Interest Rate
Tenure is the time period for which you take the Personal loan. It is inversely proportional to the EMI. So, if you want to reduce your EMI, extend your loan tenure.
Calculating EMIs
Determining EMI is easy. With the help of a simple mathematical formula, you can calculate the EMI payable on your Personal loan. The formula is:
EMI = [P x R x (1+R)n] / [(1+R)n - 1]
Here, P is the principal, R is the monthly rate of interest, n is loan tenure mentioned in months. You can easily convert the rate of interest from annual to monthly by dividing it by 12.
If you have opted for floating interest, use the prevailing interest rate to see how your EMI will change.
Personal loan Calculator
Why do manual calculations when you can make use of an EMI calculator! With an online EMI calculator, you feed in your desired loan amount, applicable rate of interest and tenure and Voila! In a fraction of a second, you get your EMI. However, it is also good to know the mathematical formula, in case you do not have access to the internet or you wish to cross-check before taking a financial decision.
Find out how Personal loan calculators can become your best friend. Click here.
Conclusion
Using EMI calculators is quick and convenient. By changing the principal amount and tenure in the EMI calculator, you can arrive at an EMI suitable to you and your pocket. Many lenders, like Bajaj Finserv, a reputed NBFC in India, have provided EMI calculators on their website. To know more, click here.