Whether personal or home, loans offer everyone easy access to cash to complete their dreams and needs. Understand how to calculate EMI easily and accurately.
It is crucial for everyone taking a loan, for a home, car, or any other reason, to understand how to calculate EMI. This is important to help in financial planning so that the monthly installments can be paid and the loan fits into the financial plan of the borrower. It also helps in budget alignment, financial planning, interest awareness, and loan awareness.
Understanding the loan EMI calculation process enables borrowers to make relevant choices, compare various loan offers, and select a suitable one. It also helps one to determine how changes in interest rate and period of the loan will affect the repayment plan. Discover the step-by-step process of how to calculate EMI for loans in India.
EMI refers to Equated Monthly Installment, which is a specific sum that a borrower pays to the lender on a certain date in any given calendar month. The EMI is applied towards the interest and the principal amount each month to fully repay the loan over a particular length of time.
The monthly EMI installments contribute to both the principal and interest on the total loan amount. When the loan matures, the interest component of the EMI payment decreases, and the principal repayment portion increases. During the early stages of the loan term, the interest component makes up the majority of the EMI payment.
Calculating EMI is essential for financial planning. It helps you:
The EMI concept is designed to simplify the repayment process for the borrower. Instead of having to pay a lump sum at the end of the loan tenure, EMIs break the repayment into manageable parts, making it easier for individuals to budget their monthly expenses.
The loan amount, interest rate, and tenure are the factors used by the lender to determine the annual percentage rate (EMI) when you take out a loan. Interest and principal repayment are included in the EMI.
A greater amount of the first EMI payments is used to pay interest, and a smaller amount is used to lower the debt. The principal repayment portion rises while the interest component falls as long as you make your EMI payments. This guarantees a steady repayment of the loan and assists the borrower in effectively managing their debt.
Here are all the important components of EMI:
Each EMI consists of part of the principal and part of the interest. To start with, a greater proportion of the EMI is applied towards interest, while a progressively greater amount is applied towards the principal as the loan period elapses.
EMI can be accurately calculated using the following formula:
EMI = P × r × (1+r)^n / (1+r)^n − 1
In this formula:
Follow this step-by-step process to calculate EMI for the loans you have taken:
Substitute these values into the EMI formula:
Let's consider a loan amount (P) of ₹100,000, an annual interest rate of 12%, and a loan tenure (n) of 5 years.
Substitute these values into the EMI formula:
EMI=100,000×0.01×(1+0.01)^60/(1+0.01)^60−1
EMI=100,000×0.01×(1.01)^60/(1.01)^60−1
EMI=1000×(1.8164)/0.8164
EMI=1816.4/0.8164
EMI≈2225.18
Thus, the monthly EMI for this loan would be approximately ₹2225.18.
The PMT function of Excel can be used to calculate EMI. The PMT function in Excel computes the payment for a loan, where the payment and the interest rate are constant.
PMT(rate,nper,pv,[fv],[type])
Where:
Using the same example as above:
In Excel, you would enter the following formula:
=PMT(0.01,60,100000)
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Here are the several factors that can influence the EMI amount:
Manually calculating EMI can be quite time-consuming and prone to human mistakes. In order to help with loan EMI calculations, IFSC has released an online EMI calculator. The straightforward and user-friendly CRED EMI calculator can be used for free.
Simply enter the loan principal amount, interest rate, and tenure and click the "calculate" button to receive precise and immediate results. Calculating the loan EMI in advance will help you find the ideal debt-to-income ratio, which will help you prevent missing loan installments.
Understanding EMI and how it works is important to properly managing loans. This will assist you in applying for new loans, effectively managing existing ones, better financial planning and management, and living a healthy financial life.
IFSC offers an accurate online EMI calculator for home, car, and personal loan EMI. Our online EMI calculators make the process more accurate and easier. It also allows you to concentrate on the financial goal you wish to achieve.
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