what is an EMI? how is it calculated?
easy access to credit through loans has made a lot of things more affordable for people with budget constraints. loans have become an important part of everyone's life and help us reach some important goals in life. from buying a car to buying a home or purchasing that expensive gadget, loans play an important part in our life. when it comes to loans, one of the most searched words associated with loans is EMI. so, what exactly is an EMI?
what is an EMI?
an EMI stands for equated monthly installment which means - the monthly amount payment that we need to make towards the loan availed. the monthly EMI payments consist of contributions towards both the principal amount and the interest on the overall loan amount. at the initial stages of the loan term, the interest component constitutes the major portion of the EMI payment, and, as we progress along with the maturity of the loan tenure, the contribution towards the interest repayment reduces and the principal repayment portion increases.
what is a loan amortization schedule?
when your loan is sanctioned by the financial lender, you receive a loan amortization schedule. a loan amortization schedule is a tabular presentation of the loan taken with the EMI payment schedule for the entire loan duration. the loan amortization table gives a clear picture of the contribution made towards the interest component and principal component of a particular EMI payment. with the help of this loan amortization schedule, you can check how the loan is being paid and how much outstanding loan is left to be paid. the loan amortization schedule document shows information such as the time period of payment, EMI, interest, principal payment, and the outstanding loan. in case you want to foreclose the loan or want to refinance your loan, you can take the help of this loan amortization schedule to figure out your best possible option.
what are the factors that affect an EMI?
loan amount, interest rate, and the tenure of the loan are the three major factors that affect the EMI. let's check them out in detail:
1. loan amount: loan amount refers to the total amount that has been borrowed by an individual. if you are taking a loan where you have an option to make an advance down payment, pay upfront as much as you can afford, and then get a loan for the rest of the amount. this way, you can save on the interest amount.
2. interest rate: interest rate refers to the rate at which the interest is charged on the amount borrowed. this is one of the major factors that affect EMI. the rate of interest on the same amount of loan differs from lender to lender. hence, it is highly advised that you should compare loan offers from various lenders and negotiate on the rate of interest to get the best deal.
3. tenure of loan: this refers to the time frame for the repayment of the loan taken. this tenure of the loan is pre-agreed between the borrower and the lender. note that the longer the duration of the loan, the more you have to pay the interest amount. also, if the loan tenure is too short, the burden of EMI will be too high. you need to find the right balance between loan tenure and EMI before you take a loan.
how is EMI calculated?
the simple mathematical formula to calculate EMI is provided below:
equated monthly installment = p × r × (1 + r)^n/((1 + r)^n - 1)
where
p refers to the principal loan amount,
r is the interest rate charged by the lender, and
n refers to the tenure of the loan in a number of months
now let's assume that someone is taking a principal loan amount for Rs 1 lakh at the rate of interest of 10 percent for a loan tenure of 12 months, the how the EMI will be calculated:
EMI = p × r × (1 + r)^n/((1 + r)^n - 1)
EMI = 1 lakh x (0.1/12) x (1+(0.1/12))^12/((1+10)^12-1
EMI = 8791.60
total interest = 5499.20
total payment = 105499.20
as you can see in the above example, the EMI payments are directly proportional to the loan amount and interest rates and are inversely proportional to the tenure of the loan. if you increase the loan amount or interest rate, the EMI payments will also increase and vice versa. in the case of tenure of loan, if you increase the tenure of the loan, the amount of total interest to be paid will also increase but the EMI payments will decrease.
other factors that affect the EMI payments
type of interest rate: the type of interest rate on the loan taken by you also affects the EMI payments. there are two types of interest on the loan - fixed interest rate loans, and floating interest rate loans. In the case of fixed interest rate loans, the EMI payments do not change during the entire loan tenure. however, in the case of floating interest rate loans, the EMI varies depending on the interest rate changes as per the prevailing market conditions. therefore, it's highly recommended that you compare the pros and cons of the interest rate type before taking a loan.
pre-closure or partial payments: these are some other factors that affect the EMI payments. when you make any partial payments towards the loan, the same amount is deducted from the principal amount of your loan, and hence, there is a reduction of the total interest that is to be paid. generally, the banks and NBFCs allow individuals to choose whether they want to keep the loan tenure constant or keep the EMI constant after making the partial payments. if you keep the loan tenure constant, the monthly EMI payments will be reduced, and, if you choose to keep the EMI constant, the tenure of the loan will be reduced. note that some banks or NBFCs may charge 3 to 5% or even higher as a pre-closure or partial payment fee.
calculate your EMI payments using the CRED calculator
manual EMI calculation can be highly time-consuming and also prone to human errors. hence, CRED has launched an EMI calculator that you can use online for loan EMI calculations. the CRED EMI calculator is available for free and is simple and easy to use. all you have to do is input the three main loan parameters - loan principal amount, interest rate, and loan tenure, and click on the ‘calculate’ button to get instant and accurate results. calculating the loan EMI beforehand can help you find the right debt-to-income balance to avoid defaulting on your loan payments.
use CRED EMI calculator now