Method of EMI Calculation on Excel

Example of EMI Calculation in Excel

To calculate the Equated Monthly Installment (EMI) for a Personal Loan of ₹500,000 with an annual interest rate of 12% and a loan tenure of 36 months using Excel, follow these steps: 

1. Enter the loan amount (₹500,000) in one cell, the annual interest rate (12%) in another cell, and the loan tenure (36 months) in a third cell. 
2. In the cell where you want to display the EMI, input the following formula =PMT(B2/12, B3, -B1) 
3. B2 refers to the cell containing the annual interest rate. 
4. B3 refers to the cell with the loan tenure. 
5. B1 refers to the cell with the loan amount, and the negative sign is used to denote the outgoing payment. 
6. Press Enter, and Excel will calculate and display the EMI amount for the specified loan details. 

Factors that affect the EMI amount

While the amount EMI towards a loan varies from person to person depending on the circumstances, the major factors that play a key role in determining the number of monthly installments are:

1. Loan amount: This is the amount that an individual borrows from the lender. Therefore, the greater this amount is, the higher the amount for EMI will be.
2. Repayment tenure: The EMIs are equally distributed throughout the entire loan repayment tenure. Hence, with a longer tenure, the borrower will have to pay a smaller amount as EMI.
3. Rate of interest: The interest rate of a loan is directly proportional to the total debt that a borrower has to pay. Therefore, an increase in the rate of interest translates to an increase in the monthly installment payable amounts.
4. Down payment amount: Making a down payment reduces the quantum of loan that an individual needs to borrow from the lender. Hence, with an increase in the amount of down payment, the EMI also reduces.
   

What Changes the EMI during the Tenure of the Loan? 

EMI does not generally change during the loan tenure period under normal circumstances but may sometime show changes under certain unavoidable circumstances. Here are some of circumstances that may cause changes in the EMI amount: 

1. Loan prepayment: Prepayment of part of loan brings down a substantial principal amount that changes the EMI amount. 
2. The progressive EMI: On increase in the salary of the borrower, some lenders allow them to pay off the EMI progressively to ensure repayment of loan faster, which may change the EMI amount. 
3. Floating interest rate: As per the dynamics of the market, the floating interest rates change which fluctuates the EMI amount. 

Why should you calculate your EMI?

There are a number of benefits to calculating your EMI amount before applying for a loan:

1. It can reduce your chances of defaulting by helping you manage your finances better.
2. You can compare the rates from different lenders and choose the one that best suits your needs.
3. You will be able to choose the loan amount and tenure depending upon your requirement and repayment capability.
4. There will be fewer chances of your loan getting rejected due to exceeding your repayment capacity.
5. You can maintain a better credit history by managing your loan in an optimum way.

Key Points to Remember for EMI Calculation in Excel

When planning to take a Personal Loan for various purposes such as home renovation, weddings, or other personal expenses, accurately calculating the Equated Monthly Installment (EMI) is crucial for effective financial planning. To ensure precision and informed decision-making, consider the following key points while calculating the EMI: 

1. Consider the Interest Rate: The interest rate plays a direct role in determining the EMI amount. Even slight variations in the interest rate can significantly impact monthly payments. Ensure you use the correct interest rate, and if it's provided annually, convert it to a monthly rate by dividing it by 12. 
2. Account for the Loan Tenure: The duration over which the loan will be repaid, known as the loan tenure, is a critical factor in EMI calculations. Longer tenures result in lower EMIs but potentially higher overall interest payments. On the other hand, shorter tenures increase EMIs but reduce the overall interest burden. Choose a loan tenure aligned with your financial capacity. 
3. Include Additional Charges: Incorporate any additional charges associated with the loan, such as processing fees, administrative fees, or prepayment penalties, while calculating the EMI. These charges influence the overall loan amount and, consequently, the EMI calculation. Refer to the loan agreement or consult the lender to ensure all relevant charges are considered for accurate EMI estimation. 
4. Be Mindful of Prepayment Provisions: Assess the prepayment provisions of the loan if it offers early repayment options. Check for penalties or charges associated with prepayment and understand their impact on EMI calculations. Evaluating prepayment options helps determine the flexibility and cost-effectiveness of repaying the loan before the designated tenure. 
5. Use an EMI Calculator: Simplify the EMI calculation process by utilizing online EMI calculators or dedicated mobile applications. These tools provide instant and accurate results. Input the loan amount, interest rate, and tenure into the calculator to obtain the EMI amount efficiently. Ensure you use reliable calculators for accuracy. 
6. Review and Validate the Calculation: After performing the EMI calculation, review the results for accuracy. Double-check parameters such as the loan amount, interest rate, tenure, and additional charges included in the calculation. It's advisable to validate the calculated EMI amount with a financial advisor or the lender to ensure precision and clarity.