Loans have become an important part of our lives. They help us achieve goals in life that might seem unattainable at first, talk about buying your dream home or affording to send kids overseas for higher education. And what’s the first thing that strikes our mind when we think about loans, and how to calculate EMI?
What is an EMI?
EMI, also known as an Equated Monthly Instalment, is a fixed monthly payment made to the lender by the borrower. This monthly payment is made on a fixed date of every month, which is pre-decided while taking the loan or credit product. EMIs are applied on the principal amount along with the interest amount every month for a specified tenure until the entire loan amount is paid back in full.
The EMI concept is great for loans where the borrower has to make fixed monthly payments for several years till the loan is paid back, like the auto loan, mortgage, or student loan. They are also great for peace of mind because you are not pressured to pay the whole amount in one go. Moreover, you can even learn to manage your monthly expenses as you have to remember the set amount to be paid every month.
What Factors Affect Your EMI?
There are three major factors that work towards deciding your EMI for a particular loan or credit product. Let’s see how these factors can affect your EMI:
- Principal Loan Amount
The higher the principal loan amount, the higher your EMI will be. The principal loan amount is the original loan amount the lender lends to a borrower. This is the main factor that decides the rest of the factors like the EMI tenure and interest rate of your loan.
- Loan Tenure
Loan tenure is the time period in which you have to pay back the entire loan to the lender. The longer the tenure, the more your EMI will last. This means you would have to pay the interest rate for longer.
- Rate of Interest
The interest rate is charged on your loans and has a major part in influencing the EMI. The higher interest rates paired with loan tenure, the higher your total payable amount will be. Different financial institutions have different interest rates for their loans; hence, it is essential to compare various loans to go with the best option available.
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How to Calculate EMIs
There are two methods to calculate the EMI of a loan. The first one is the flat rate method, and the other is the reducing balance method.
- The Flat Rate Method
This method calculates the EMI by adding the interest rate to the initial principal loan amount. It is applicable throughout the entire loan tenure. With this method, the interest remains fixed for every month you pay your EMI. To calculate your EMI using this method, you first have to add the principal loan amount with interest rate, and then the result is divided by the total number of years that the loan will last.
- The Reducing Balance Method
With this EMI-calculating method, you calculate the total interest rate of your loan on the outstanding loan amount on a monthly basis. This reduces your effective interest rate and is the best method to calculate EMIs for home loans, credit cards, mortgages, and overdrafts.
Calculate Your EMIs with an EMI Calculator
If calculating EMIs manually has been a huge hassle, don’t worry; there are EMI calculators that can lessen your workload! An EMI calculator is an online tool that assists you in calculating the EMI amount of your loan and further allows comparison between the EMI and tenures of different loans. The calculator calculates the EMI based on the three basic factors – Principal Loan Amount, Interest Rate, and Tenure.
With the help of an EMI calculator, you get to:
- Know how much a loan will cost you and how much you are going to spend on the interest rate so that you can plan your monthly budget accordingly
- Figure out the best loan for your needs and requirements
- Forget the worry of making mistakes in counting the EMI amount
Author Bio: Tanvi Kaushik specializes in Content Marketing and works with the Digital Team at KreditBee – India’s fastest personal loan platform where self-employed and salaried professionals can easily avail of personal loans in just a few minutes when in need of quick funds. Tanvi writes to-the-point articles on personal finance and budgeting which are truly appreciated by her readers. She is committed to making money matters easy to understand even for the layman. Her commitment to her work doesn’t stop her from pursuing her hobbies of hiking, trekking and going on adventurous trips.
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