Loans and EMIs go hand-in-hand as your equated monthly instalments (EMIs) start as soon as your loan is disbursed. These days, taking a loan to buy your dream house, car, property renovation, funding your child’s education, starting a business and so forth has become quite popular and convenient for all. The various types of loans offered by banks help us realise these dreams with the option of easy monthly repayments.
It’s always good to know how much your monthly instalments will come up to before you apply for a loan so that you can calculate your monthly expenditures accordingly. However, not all of us may be aware of how monthly instalments are calculated for loans.
Read on to learn how EMIs are calculated.
What is EMI in banking?
In simple terms, EMI is the amount of money which is paid back to the lender on a monthly basis. The EMI is paid back to the lender or bank on a fixed date every month until the total loan amount due (including the interest rate) is paid.
You can always choose to auto debit the EMI amount every month from your preferred bank account.
Factors affecting EMI
The EMI of a particular loan is clearly dependent on three basic factors:
- Loan amount: How much have you borrowed from the bank? That’s the prime factor that determines your monthly instalments.
- Rate of interest: What is the rate of interest charged by the bank on your loan? This is generally determined by the bank after making several calculations like your income, repayment capacity, credit history, market conditions and other factors.
- Tenure: How long will you take to repay the entire loan amount including the interest rate? That’s the tenure of your loan which will impact your EMIs.
How is EMI calculated?
Your equated monthly instalment (EMI) comprises of two components; principal amount and interest rate. The interest amount is higher in the initial years and keeps reducing over the years.
The mathematical formula for calculating your EMI is:
(Principal amount x interest) x (1+interest) tenure/ [(1 + Interest) tenure – 1]
It may be a little difficult to calculate your monthly instalments using that complex mathematical formula, but you can always rely on the different online EMI calculators for some quick and easy help!
- Personal Loan EMI Calculator
- Home Loan EMI Calculator
- Car Loan EMI Calculator
- Education Loan EMI Calculator
Generally speaking, your EMI payments will be higher if your loan amount is higher. Also, if you choose a longer https://www.bankbazaar.com/finance-tools/emi-calculator.html?tenure, you will end up paying a higher rate of interest and vice versa.
Variable EMI payments
EMI payments also vary depending on the type of interest you chose when you applied for the loan. For fixed rate loans, EMIs remain the same for the entire loan tenure. But if you opt for floating rate loans, the interest rates vary depending on the market conditions and prevailing rates.
Video: Fixed Versus Floating Rate of Interest
Additionally, in case you prepay and foreclose any of your loans, then the prepayment amount is deducted from the principal amount. This also results in a deduction of the interest rate, which in turn reduces your monthly instalments as well.
Hope all that information comes in handy when you calculate the monthly instalments on your loans! And just in case you thought of applying for a loan after doing your EMI calculations, there’s a good place to start: BankBazaar!