With the cost of living in the 21st century reaching sky high, loans have become an integral part of our livelihood. Every time we fall short of finances in meeting our financial needs we look up to banks and financial institutions to help bridge the gap between the requirement and the availability of the finances at our disposal. With loans, we can even meet the financial goals which might seem impossible to achieve otherwise. There are several scenarios in which one asks for a loan like to fund their child's education, to get married, to renovate or buy a dream home, to buy a new car or to meet some upcoming important expenses at the personal front. No matter what your need be, you will find a loan catering to your specific requirement.
However, applying for a loan and getting it is not the end of the story, there are some significant terms and implications that you must understand when you apply for a personal loan.
Equated Monthly Installments or EMI's is one such term that you would come across often when applying for personal loans of any kind. To explain in simple terms, EMI is a stipulated amount that you will be paying on monthly basis for the repayment of your loan. You can pay your EMI either through the auto debit instruction which you can easily set-up on your bank account or through the borrower cheque which you need to send every month without fail. In both the scenario's the amount you will be paying will remain same along with the tenure for which you need to keep paying the EMI.
How to Calculate EMI?
When it comes to calculating EMI there are 3 important factors that one must take in consideration:
The Loan Amount – Your loan amount is basically the total amount that you have borrowed. Many a times, the borrower is sanctioned a larger loan amount but their EMI will be calculated on the amount they have actually borrowed and not on the total amount they have been sanctioned.
Interest Rate – The personal loan interest rate is something that you will be charged by the bank or any lending institution that you might have approached for loan. The personal loan rates are calculated on the reducing balance for the total sum lent.
The Tenure of Loan – Your loan tenure s the entire period for which you take borrowed the loan. On the basis of the tenure only your EMI will be calculated. Your loan tenure is also actually the number of EMIs you will have to pay for repayment of loan.
EMI Calculation Formula
EMI = P * r * (1+r)n / (1+r)(n-1)
P = Principal or Amount borrowed, R = Rate of interest per annum, N = number of installments.
However, the evolving technology has simplified the EMI calculations with easy availability of online EMI calculators and you no longer need to calculate the EMIs manually. There are numerous loan EMI calculators available online that you can use to instantly get the amount you will need to pay every month basis your loan amount, interest rate and tenure.
To put things simply for your understanding, your loan EMI will remain directly proportional to the interest rates you are offered and the principal amount that you have borrowed, but it will remain inversely proportional to your loan tenure. The higher the loan amount or interest rate the higher will be your EMI, but if you opt for a longer tenure, your EMI will be reduced significantly.
Let's Understand The Calculation With an Example:
Supposedly, XYZ has applied for the personal loan of Rs. 1,00,000 and the interest rate they have been offered by their bank is 12% for 12 months. In this case, their monthly EMI will be Rs. 8884/-. However, if the loan amount and tenure remains the same but the interest charged is 15%, the EMI will be Rs. 9025/-, whereas the same amount and same interest for a longer tenure, say 36 months, would make monthly EMI of Rs. 3321/-. If the loan amount is Rs.2,00,000 with 12% interest rate and 12 month tenure, the monthly equated installment will be of Rs. 17,769/-.
Why Using a Loan Eligibility Calculator Is Important?
People get extremely excited with the prospect of getting financed and start planning out the ways in which they will make use of that money. But, one thing which they completely overlook here is their debt-repayment perspective. Understanding your EMIs and your loan eligibility beforehand allows you to plan your budget and monthly expenses accordingly, so that you will not miss out on your loan repayment.
To help you get through this, there are several websites that provide free tools like loan eligibility calculator and loan EMI calculator that let you know the amount of EMI that you would have to pay every month once you get your loan disbursed. People who calculate their EMIs before applying for loan prepare themselves beforehand and also understand how their life and expenses will be modified once the EMI schedule will begin. Those who do not plan in advance for debt repayment often end up missing the EMIs, which leads to poor credit score.
Also, loan EMI calculators give you freedom to compare EMI and interest rates of different financial institutions that lend money. Checking eligibility through EMI calculator tools can also help in getting better deals for your personal loan.
Your EMIs are calculated in such a fashion that you end up paying a certain amount of your loan and interest every month. The initial phase of your loan EMI is dedicated to the repayment of the interest and thereafter you start paying the principal amount, which is most cases comes after paying almost half of your total installments.
After the loan is processed you will be given an Amortization Schedule. It will give you the break-up of your EMIs into the interest amount and the principal component divided month on month basis. Though most of the banks and financial institutions share amortization schedule, in case you haven't received you can ask for the same or you can also check it online using the online interest calculator tools. Your amortization schedule is an important document which you must check before signing on the dotted line for final disbursal.
Why Your EMI May Change Over Time
Though it is not necessary that your EMI will change after a certain point of time, but if there is any change in the basics of the loan EMI calculation, then your EMI might change. The scenarios in which the EMI may change include:
Prepayment of Loan: Here if the borrower prepays the loan amount, their principal amount will come down and also there will be a marginal change in interest calculated, which will bring down the EMI.
Change In Interest Rate: If you taken loan on flexible interest rate then your EMI will fluctuate as per the change in interest rate.
Restructuring of Loan: If a borrower asks the lender to increase the loan tenure than there will be change in the EMI.
Since the easy availability of online loan EMI calculators has made the calculations simple for a common man, now anyone who is in need of money can check their eligibility and apply for the same. You not only get to check your affordability to apply for loan, but you also get to know the repayment schedule in advance so that you can plan your finances accordingly to avoid poor credit score.
Your EMI will vary depending on your loan amount, interest rate and tenure and your amortization schedule is the most authentic way to see your outstanding loan payment. The bottom line for any kind of personal loan is the EMI and knowing your EMI in advance can help in advance planning for repayment of the loan.