How Loan EMIs Are Calculated: A Simple Guide to Manage Your Finances
Loan companies help individuals manage both planned and unexpected financial needs. Today, they’ve become a part of everyday life, making big purchases, like a home, a car, or even a foreign trip, more within reach. However, before taking a loan, it’s essential to understand the EMI, or Equated Monthly Instalment, that you’ll need to pay back every month. Since this payment lasts for a set period, knowing your EMI upfront helps you plan your budget and manage the loan principal wisely. In the following sections, we’ll break down how EMIs work, the different types, and everything else you need to know.
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 19% 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+19)^12-1
EMI = Rs. 9216
Understanding this EMI formula helps you see how the EMI is calculated on your loan. The monthly EMI is directly proportional to the principal loan amount you borrow and the applicable interest rate. It is inversely proportional to the loan type and repayment tenure you select. The EMI increases with the loan amount and total interest, and decreases with a longer tenure.
Factors that Affect the Monthly EMIs
The following three factors affect the EMI plans and monthly EMI:
- Loan Amount: This refers to the principal amount you borrow from the lender. Evaluate your financial needs and decide on an adequate loan to cover your requirements.
- Interest Rate: This is the rate at which the loan company provides the finance. It is the percentage of the loan principal that you must pay, in addition to the EMI.
- Repayment Tenure: This is the timeframe during which you agree to repay the loan with interest. Lending institutions offer flexibility here. You can choose a tenure that results in affordable EMI payments.
Using an Online EMI Calculator
The EMI calculator is an online platform that calculates the 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 repayment tenure to find a tenure with affordable EMIs.
Calculating the EMIs manually can be time-consuming. Moreover, it is prone to inaccuracy, making financial management even more challenging. Therefore, use an online personal loan EMI calculator at Hero FinCorp to calculate your EMIs and plan your finances efficiently.
Benefits of Calculated EMI
Calculating EMIs in advance helps in effective financial planning, ensuring affordability and preventing financial strain. Here are its key benefits:
- Better Budgeting: Helps manage monthly expenses efficiently.
- Avoids Financial Strain: Ensures affordability before loan approval.
- Improved Credit Management: Reduces the risk of defaults.
- Loan Comparison: Aids in choosing the best loan option.
- Prepayment Planning: Assists in strategic loan repayment decisions.
Why You Must Use a Loan Calculator to Know Your EMI Amount
A loan calculator helps you estimate your EMI accurately, ensuring better financial planning. It prevents unexpected costs and helps compare different loan options.
- Accurate EMI Estimation: Helps plan your monthly budget efficiently.
- Time-Saving: Quickly calculates EMI without manual effort.
- Better Loan Comparison: Assists in selecting the most suitable loan.
- Prepayment Insights: Shows impact on tenure and interest.
- Avoids Financial Surprises: Ensures clarity on repayment obligations.
Conclusion
Understanding how to calculate EMIs is vital to strengthen your financials. Set realistic goals, strategise your payments, and pay EMIs on time to avoid complications. Use the EMI Loan Calculator from Hero FinCorp's official website to ensure correct calculations.
Frequently Asked Questions
1. What Factors Influence The EMI Amount?
The EMI amount depends on the loan amount, interest rate, repayment tenure, and type of interest (fixed or floating).
2. Why Does The EMI Decrease With A Longer Repayment Tenure?
A longer tenure spreads the loan amount over more months, reducing each EMI, though the total interest paid increases over time.
3. Can I Adjust The Repayment Tenure To Find A More Affordable EMI?
Yes, extending the tenure lowers EMI, while shortening it increases EMI but reduces the overall interest paid on the loan.
4. What Details Are Required To Calculate EMIs Using An Online Tool?
For accurate EMI calculations, you need the loan amount, interest rate, repayment tenure, and loan type (fixed or floating interest).
Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available during writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Before making any decisions, readers are advised to independently verify any details mentioned here, such as specifications, features, and availability. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.
