look at the traditional way of calculating the emi for any personal loan or other loans in two simple steps

finance

February 12, 2021

4 min read

source: photo by amol tyagi on unsplash

when you are looking into taking a loan, you should ensure an affordable emi for the same. emi is short for equated monthly installment, and it is how the loan is repaid. after the loan is sanctioned, the borrower pays the emi every month, over the repayment period, to pay off the loan. each emi contains the principal as well as the interest component of the loan.

affordability of the emi is important because emis are payable over a considerable period. if they are not affordable, you might default on the repayment which would incur additional interest charges and damage your credit score. to avoid such repercussions, you should calculate the loan emi** **before you opt for the loan.

the traditional way of calculating the emi rate is to use a mathematical formula. the formula depends on the type of interest charged on loan. usually, two types of interests are charged which are as follows -

in this case, the interest is charged on the total amount of loan that you avail. the loan emi, in this case, is calculated using the following formula -

emi = (principal + interest) / repayment tenure in months

for example, if you avail of a loan of ₹50,000 for 2 years and the interest rate is 10%, you would have to pay an interest of ₹5,000 each year. the total interest payable would be ₹10,000, and the emi would be calculated as follows -

emi = (50,000 + 10,000) / 24 = ₹2,500 per month

this is the most commonly used concept of calculating the interest on the loan. the interest is charged on the outstanding amount of the loan. as you continue repaying the loan, the outstanding loan amount reduces and so the interest payable also reduces with every emi. the formula to calculate the emi under this method is as follows -

emi = [p * r * (1+r)^n] / [{(1+r)^n}-1]

in this formula, 'p' is the loan amount, 'r' is the monthly interest rate and 'n' is the repayment period in months.

for example, if you avail of a loan of ₹50,000 for 2 years at an interest rate of 10%, the emi would be calculated as follows -

emi = [50,000 * 0.0083 * {(1.0083)^24}] / [{(1.0083)^24} - 1] = ₹2307 (rounded-off)

why remember the complicated mathematical formulae when the emi calculator is available?

emi calculators are online calculation tools that help you calculate the loan emi easily in an instant. you just have to enter in the -

- loan amount
- tenure
- interest rate

the emi would be calculated accurately. you can also change these details to find the new emi. emi calculators are free of cost, and you can use them multiple times to find the most affordable loan emi.

cred offers emi calculators that allow you to calculate the loan emis easily. you can visit cred and use its emi calculator to find the loan's most feasible emi rate. once you find the right emi, you can go ahead and apply for the loan.

calculate the emis before availing of the loan and use emi calculators for simplifying your calculations.