While it is not very difficult now to take a personal loan, it is not so simple to pay back the loan. This is because personal loans are unsecured loans, and come with high interest rates. As a result, the Equated Monthly Instalment factor (or the EMI) can be a drain on your salary, depending on the amount and tenure for which you borrow.
Before we get into how the EMI is calculated and what it is comprised of, let’s briefly understand what an EMI is. An EMI is the monthly amount you pay to your bank towards repayment of the loan you borrowed. All loans come with the concept of EMI and even credit card dues can be repaid in the form of an EMI. EMIs can be effected by various ways, depending on the bank you deal with. It can be in the form of a standing instruction, by giving post dated cheques or by having an electronic clearing service from your account in another bank. Whatever be the mode of EMIs, the concept of calculating EMI is the same. For personal loans EMIs are calculate by Personal Loan Calculator.
The EMI Break up
An EMI, as you know, comprises of principal component and an interest component. If you have taken a personal loan of Rs. 5 lakhs for 1 year, then this amount is divided into small parts across the 5 year. If the interest rate is 15% per annum, then this interest on the loan is also apportioned across the tenure and forms a part of the EMI. In the initial years of any loan, the interest forms a larger portion of the EMI. Then, as the years go by and the loan nears completion of tenure, the principal component increases.
Let’s understand better with an example. Taking the same case as above, the EMI for a Rs. 5 lakhs personal loan for 1 year at 15% pa rate of interest is Rs. 45,129. So you will have to pay Rs. 45,129 every month for 1 year as repayment. This amount is split into principal repayment and interest repayment, with interest component being higher initially, as below:
| Month | Principal | Interest | Total EMI | Principal Component | Interest Component |
| 1 | Rs. 38,879 | Rs. 6,250 | Rs. 45,129 | 86% | 14% |
| 2 | Rs. 39,365 | Rs. 5,764 | Rs. 45,129 | 87% | 13% |
| 3 | Rs. 39,857 | Rs. 5,272 | Rs. 45,129 | 88% | 12% |
| 4 | Rs. 40,355 | Rs. 4,774 | Rs. 45,129 | 89% | 11% |
| 5 | Rs. 40,860 | Rs. 4,269 | Rs. 45,129 | 91% | 9% |
| 6 | Rs. 41,371 | Rs. 3,759 | Rs. 45,129 | 92% | 8% |
| 7 | Rs. 41,888 | Rs. 3,241 | Rs. 45,129 | 93% | 7% |
| 8 | Rs. 42,411 | Rs. 2,718 | Rs. 45,129 | 94% | 6% |
| 9 | Rs. 42,941 | Rs. 2,188 | Rs. 45,129 | 95% | 5% |
| 10 | Rs. 43,478 | Rs. 1,651 | Rs. 45,129 | 96% | 4% |
| 11 | Rs. 44,022 | Rs. 1,107 | Rs. 45,129 | 98% | 2% |
| 12 | Rs. 44,572 | Rs. 557 | Rs. 45,129 | 99% | 1% |
| Total | Rs. 5,00,000 | Rs. 41,550 | Rs. 5,41,550 | 100% | 100% |
As you can see from the above table, the interest component of the EMI is very high in the initial months and gradually tapers off. The effect of a high interest component can be better understood when the tenure is longer. If we extrapolate the above for a 5 year loan, the repayment pattern for the initial few months will be as follows:
| Month | Principal | Interest | Total EMI | Principal Component | Interest Component |
| 1 | Rs. 5,645 | Rs. 6,250 | Rs. 11,895 | 47% | 53% |
| 2 | Rs. 5,716 | Rs. 6,179 | Rs. 11,895 | 48% | 52% |
| 3 | Rs. 5,787 | Rs. 6,108 | Rs. 11,895 | 49% | 51% |
| 4 | Rs. 5,859 | Rs. 6,036 | Rs. 11,895 | 49% | 51% |
| 5 | Rs. 5,933 | Rs. 5,962 | Rs. 11,895 | 50% | 50% |
| 6 | Rs. 6,007 | Rs. 5,888 | Rs. 11,895 | 50% | 50% |
| 7 | Rs. 6,082 | Rs. 5,813 | Rs. 11,895 | 51% | 49% |
| 8 | Rs. 6,158 | Rs. 5,737 | Rs. 11,895 | 52% | 48% |
| 9 | Rs. 6,235 | Rs. 5,660 | Rs. 11,895 | 52% | 48% |
| 10 | Rs. 6,313 | Rs. 5,582 | Rs. 11,895 | 53% | 47% |
The above will continue for 60 months (total tenure) and in the 60th month, the principal component will be 99% and interest will be 1% of the EMI. Total interest paid on the above loan will be Rs.2,13,698, which is almost 43% of the principal.
So it is clear that you will be paying exorbitant amount as interest over the tenure of the loan. For larger loans with longer tenures, the interest burden is higher.
How can you as a borrower calculate EMIs?
These days, it is very simple to check if the EMI charged by your bank is correct or not.
- Check with Bank Bazaar’s Online Personal Loan EMI calculator, which is simple to use and free of cost.
- You can also use MS Excel to calculate EMI, principal component and interest component. Use the PMT formula in excel which is =PMT (rate, nper, PV). The rate is the monthly interest rate (divide your annual rate by 12), nper is the total number of months of your loan and PV is the loan amount borrowed.
If accessing online emi calculators or using Excel is difficult, then you can use the conventional mathematical formula: EMI =(Principal x interest rate)*(1+interest rate) n / ((1+interest rate)n – 1). Interest rate is again the monthly interest rate and n is the tenure in months.