Introduction
We have all grown up hearing the words EMI. Many ads have also been running over the years that show banks offering loans at lower EMIs and flexible payment modes. While the term may be quite common in today’s world, not many may even know the full form of the term EMI or how it is calculated.
Below are a few details regarding the meaning of EMI and how EMI calculators can be quite useful for an average Indian.
What is EMI?
When we approach a bank or an NBFC for a loan, they consider the tenure of the loan, our repayment capacity, and their applicable rate of interest on the loan for finally calculating the amount to be repaid to them. This amount is then split into easy monthly payments that can be paid to the lender through various modes like PDCs, net banking, auto-debits, etc. These monthly repayments of the loan taken are known as EMI (Equated Monthly Installments).
What is the formula to calculate EMI?
Now that we know the meaning of EMI, let us understand its calculation. We understand that EMI is made up of the interest on the loan along with the principal amount that is to be paid every month. The important question here is how do we calculate an amount that will correctly represent the interest along with the principal amount and in what proportion. This amount is derived using the formula given below.
EMI = P x r x {(1+r)^n/ [(1+r)^n-1]}
In the above formula,
P = Principal
r = Rate of interest (where ‘r’ is represented as r/12/100 which is a per month rate)
n = Tenure (in months)
To explain the above formula, let us consider an example. Mr. A has taken a loan of Rs. 10,00,000 at the rate of 10% for 5 years. The amount of EMI, in this case, is calculated hereunder.
EMI = 1000000 x 0.00833 x {(1+0.00833)^60 / [(1+0.00833)^60 – 1}
EMI = Rs. 21247
The above formula helps in determining the amount that has to be paid every month for the tenure of the loan by the borrower to completely repay their loan. It uses the concept of reducing balance where the interest is charged in the outstanding principal amount at the end of the previous year. This calculation becomes quite complex in the case of long-term loans like home loans where the tenure can be up to 30 years.
What is an EMI calculator?
As mentioned above, the formula for calculating the amount of EMI helps the borrower in understanding the amount that is to be paid by them every month towards the loan repayment. However, the above formula is quite complex especially for a layman who may have no understanding of the concept of reducing balance. In such a case, whether the loan is for the short term or the long term, calculating the exact amount of EMI can be quite difficult. This is where EMI calculators come into the picture.
EMI calculators are a very simple but important tool available on the websites of the majority of lenders and other websites that may help in customer awareness. This tool uses three main components that are used in the calculation of EMI, namely,
- Amount of loan
- Rate of interest
- Tenure of loan
How to use the Fisdom EMI calculator?
Customers can also find an EMI calculator on the Fisdom website to help them calculate their EMI amount easily within minutes. The EMI calculator tool on the Fisdom website is available under the tab ‘Resources’ on the homepage.
The steps to use the Fisdom EMI calculator are given below
- Enter the amount of loan
- Enter the applicable rate of interest
- Enter the tenure of the loan
After providing the above details, customers will immediately get the amount of EMI to be paid by them displayed on their screen. This amount will help them in getting an idea of their monthly outflow towards loan repayment.
Conclusion
EMI calculators have become one of the basic tools for every person seeking any loan. This tool helps them to understand the amount that they will be required to pay monthly till the end of the loan tenure to square off their loan. This further helps in financial planning and budgeting the monthly expenses in a better or more efficient manner so the EMI does not become a burden for the borrower.
FAQs
The various types of EMI calculators are home loan EMI calculator, personal loan EMI calculator, car loan EMI calculator, business loan EMI calculator, education loan EMI calculator, etc.
EMI calculator can be used to calculate the EMI for every type of loan like home loan, car loan, personal loan, business loan, etc. EMI calculators are easy or simple to use and can be available free of charge for every potential borrower.
Amortisation schedule is the schedule of the EMI payments that tracks the amount of loan repaid and the interest component in each EMI till the full repayment of the loan taken by the borrower.
Yes. EMI calculators are 100% accurate and easy for any user as they simply have to provide basic inputs to calculate the amount of EMI to be paid by them.
Yes. Borrowers use the EMI calculator multiple times and try different combinations to get the EMI amount by changing either the interest rate or tenure or loan amount. This will help them get an EMI that may be the best fit for the borrower.
