EMIs or equated monthly installments are what we repay every month for our loans, be it personal loans, home loans, car loans and the like. It is important to understand the modalities and intricacies of these EMIs before you apply for a loan. Whenever you apply for a personal loan, the financial institution in question will first scrutinize your overall eligibility for getting the personal loan and will offer all details about the loan in tandem with the amortization table and monthly EMI amount that you will have to repay. Most customers do not take into account the calculation for the EMI because it appears a little complicated.
However, you can always make use of an EMI calculator in order to ascertain the right loan amount and monthly outgo for your personal loan. You will also be helped with regard to deciding on factors like tax benefits, prepayment of the loan and foreclosure among others. EMIs are comprised of principal and interest components although they are not in equal amounts. For example, if you are repaying an EMI of Rs. 35, 000 every month, the principal component may be Rs. 12, 000 with the interest component being Rs. 23, 000. This is just to show that exact halves of principal and interest are not cut every month through EMIs. When you start repaying the loan, the interest component is higher and this keeps going down and when the tenor starts nearing, you repay the principal more than the interest.
The Loan Amortization Table is something that you need to carefully ponder over. This table breaks up the entire tenor of the loan and the repayment process. This has details about the principal amount outstanding, the interest to be repaid on the principal and the principal amount that has already been paid. The EMI amount break-up will also be available. As a result, you can directly see the interest amount that you have already repaid. This can help you plan prepayment, transfer or foreclosure of the loan.
EMIs are dependent on the loan tenor, rate of interest and the principal amount. The latter is the amount borrowed and the loan amount is directly proportional to the EMI that you repay. The EMI amount increases naturally with an increase in the principal amount. The rate of interest is the cost of taking money from the financial institution. The rate is impacted by factors like the credit score, repayment abilities and overall earnings of the customer. You can choose between floating and fixed rates of interest and EMIs will vary accordingly. The tenor is the period of time for which the personal loan is taken. Lowering the EMI means that you have to increase the loan tenor.
The formula for calculating the EMI is as follows:
EMI = [P x R x (1+R)n] / [(1+R)n – 1]
In this case, R is the rate of interest and P is the principal. The loan tenor is n and you can convert the interest rate to monthly from annual by dividing the same by 12. You can always use an EMI calculator online and enter in details like the loan amount that you want, the rate of interest that is applicable and the tenor. You will get the EMI amount in a few seconds. Using EMI calculators is a smart move since it saves time and energy in good measure. There are several financial institutions who offer EMI calculators on their official websites.