How is EMI Calculated?

Loan companies provide finance to cover planned and unplanned expenses. They have become integral parts of people’s lives. Expensive things like home, car, and foreign trips have come within everyone's reach. However, when seeking a loan, you must be concerned about the monthly installment you must pay each month. Since you must adjust it in your monthly budget for a long period, calculating it accurately helps you plan the finances appropriately. The following sections will discuss how to calculate EMIs and other related information.

What is an EMI?

EMI stands for Equated Monthly Installment. It is the monthly payment you must pay the lender to repay the borrowed loan with interest. The EMI calculation depends on three factors – the loan amount, interest rate, and repayment tenure. 

How to Calculate Loan EMIs?

Here is the mathematical formula to calculate loan EMIs: 

EMI = P × R × (1 + R)^N/((1 + R)^N - 1) 

Here, 
P = Principal, 
R = Rate of interest per month, and 
N = Number of months in the loan tenure.

Suppose you borrow Rs 1 Lakh at a 10% annual interest rate for a tenure of 12 months, here is how to calculate the monthly EMIs:
EMI = 1,00,000 x (0.1/12) x (1+(0.1/12))^12/((1+10)^12-1
EMI = Rs. 8791.60

If you change the repayment tenure for the same loan amount and interest rate, the EMI amount can also be Rs. 5000 for 24 months and ₹3611/- for 36 months. 
The monthly instalment amount is directly proportional to the principal amount you borrow and the applicable interest rate. It is inversely proportional to the loan tenure you select. The EMI increases with the loan amount and interest rate and decreases with a longer repayment tenure.
 

Factors Affecting the EMIs

The following three factors affect the EMIs:

1. Loan Amount: It is the total amount you borrow from the loan provider. Evaluate your financial requirements and decide upon an adequate loan amount to cover your needs.
2. Interest Rate: It is the rate at which the loan company lends you the loan. It is a percentage of the loan amount you must pay along with the principal amount.
3. Repayment Tenure: It is the time frame you agree to repay the loan with interest. Lending institutions are flexible with their terms. You may choose one with affordable EMIs.

Using an Online EMI Calculator

EMI calculator is an online tool that calculates loan EMIs using the above three factors. Follow these steps to use this efficient tool:

• Visit the lender’s website.
• Open the online EMI calculator.
• Enter the loan amount you wish to borrow.
• Enter the interest rate charged by the loan provider.
• Enter a tentative repayment tenure to estimate the EMIs.
• Click ‘Calculate’.

Your EMI amount, interest amount, and total loan cost will appear on your screen. If you wish to decrease or increase the EMI amount, adjust the tenure to find a tenure with affordable EMIs.
Calculating the EMIs manually can be time-consuming. Moreover, it is prone to errors, making financial management more challenging. Therefore, use an online EMI calculator at Hero FinCorp to calculate your EMIs and plan your finances efficiently.
 

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