The Ultimate Guide to EMI Calculation: Understanding the EMI Formula
Introduction
If you plan to take a loan for any purpose, such as buying a home, a car or funding your education, you must know how much you must pay back every month. This monthly payment is called the Equated Monthly Instalment (EMI), the amount you pay to the lender until you repay the loan in full. Knowing your EMI can help you to plan your budget, manage your cash flow, and avoid defaulting on your loan.
But how do you calculate your EMI? What factors affect your EMI? Let us answer all these questions and more in this blog.
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What is the EMI Formula?
The EMI calculation formula is a mathematical equation that helps you determine your monthly instalment for any loan. The formula is as follows:
Equated Monthly Instalment= [P x R x (1+R)^N] ➗ [ (1+R)^N-1]
where,
- P is the principal or the amount that you borrow as a loan
- R is the rate of interest that is charged on the borrowed sum
- N is the repayment tenure or duration in the number of months
Note: the interest rate should be a monthly rate for calculation purposes. Divide the annual rate by 12 to compute the monthly rate.
To help you learn this concept, let's pick a simple illustration.
Let's say you want to borrow Rs 5,00,000 from a bank for a period of 5 years at an annual interest rate of 10%. Based on the given formula, the EMI computation will be as follows:
EMI = [5,00,000 x 0.00833 x (1+0.00833)^60]/ [ (1+0.00833)^60-1]
EMI = Rs 10,624.96
This means you must pay Rs 10,624.96 every month for 60 months to repay the loan amount with interest.
However, manual calculations can be time-consuming, complex, and error-prone. That is why it is better to use an online EMI calculator that automates this calculation and gives you the result in a split second.
How to Use an Online EMI Calculator?
An online EMI calculator is a handy tool that calculates your EMI for any loan with just a few clicks. You can find various online EMI calculators for different types of loans. All you need to do is enter the following information in the EMI tool:
- The principal borrowing amount you wish to avail (in rupees)
- Loan tenure (in months or years)
- Rate of interest (in percentage)
Once you input all the above variables, the online EMI calculator will display your EMI amount and other details, such as total interest payable, total payment (principal + interest), and payment schedule. You can also adjust the values in the EMI calculator per your preference and see how it affects your monthly obligations.
What are the Benefits of Using an Online EMI Calculator?
Using an online EMI calculator has several benefits, such as:
- It saves you time and effort by doing the calculations in seconds.
- It eliminates the chances of human errors or mistakes in computations.
- It helps you to compare different loan options and choose the best one for your needs.
- It allows you to plan your finances and budget accordingly.
- It enables you to avoid borrowing more than you can afford or defaulting on your loan.
How to Reduce Your EMI?
If you want to reduce your EMI, you can try the following ways:
- Choose a lower principal amount: Only borrow the amount you genuinely require and can comfortably repay. By doing so, you will not only lower your EMI but also minimise your overall interest expenses.
- Research: Compare different lenders and loan options and choose the one that offers the lowest interest rate for your loan. This will reduce your EMI as well as your interest cost.
- Choose a longer tenure: Extend your loan repayment period to reduce your monthly instalment. However, this will increase your total interest cost in the long run.
- Prepayment: If your lender permits partial prepayment, consider using windfall income, such as a job bonus or trading earnings, to pay off a portion of your outstanding dues. This can result in a substantial reduction in your EMI.
Conclusion
EMI calculation is an essential step in taking any loan. It helps determine your borrowing capacity before actually applying for a loan. It also lets you know how much you must pay back every month and assist in planning your finances accordingly. You can use the EMI formula or an online EMI calculator to calculate your EMI for any loan. You can also use this tool to compare different loan options.
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