Getting a personal loan to tide you over in times of a financial crisis is relatively easy nowadays. Most banks offer personal loans with flexible terms and conditions. You can compare the quotes and terms and conditions of various banks and choose the deal that best suits you. While taking a loan, knowing the equated monthly installment or EMI is top priority. This tells you how much you have to pay the bank every month and whether you can afford this. Once you decide that you can pay the EMI, you can plan your budget accordingly. Most banks have an EMI calculator which will help you find out easily the EMI for the loan that you intend to avail. You will have to start paying the EMI from the month following the month that you get the full loan amount. The principal amount as well as the interest is repaid through EMI.
How is the EMI calculated?
When calculating the EMI, the loan amount, the interest and the loan duration is taken into account. The EMI is usually calculated using the flat rate system or the reducing system. In the flat rate system, the rate of interest on the loan amount is calculated over the full duration of the loan, the principal and the interest is divided over the number of installments and the value arrived is your EMI.
In the reducing system, the interest is charged on the outstanding balance of the loan, which goes on reducing. The EMI is calculated using the formula EMI = (P x i) (1+i) ^n / ((1+i) ^n) – 1 where P is the principal amount, i is the interest rate and n is the tenure of the loan. For example, if you are taking a loan of Rs. 15,00,000 and the interest rate is 11% and the loan duration is for 5 years, then
P = 15, 00,000
i = (11/ 100)/12 = 0.00916
n = 5 x 12 = 60
Then the EMI is calculated as
(1500000 x 0.00916) (1 + 0.00916)60 / ((1+0.00916)60) – 1
Therefore EMI = Rs. 32,614.
Once you have calculated the EMI, you should ensure that you can afford to repay the amount in the correct time.
Facts about EMI
When paying the EMI, interest repaid decreases with each passing month while the principal repaid increases with each passing month.
EMI is usually the lowest when interest is calculated on a daily reducing basis.
If your loan amount goes up, then the EMI is larger. Similarly, the EMI will be larger if the interest rate is higher. However, the EMI will come down if the loan repayment term is longer.
The EMI vary even when the loan amount, interest and the loan tenure are the same due to the variations in the compounding frequency of interest rates.
Personal loan EMI calculator can help you find the ideal offer which will not cause too much financial strain.