EMI or Equated Monthly Installments is a fixed amount that is paid by the borrower to the financier, on a monthly basis. This amount will contribute to the principal loan amount and the interest applicable on the loan. Payment of EMI is spread over the loan tenure that is opted for by the borrower.
EMI Calculation Methods
Calculating EMI has a Simple Formula, Which is As Follows:
EMI = (P X R/12) X [(1+R/12) ^N] / [(1+R/12) ^N-1].
P is the original loan amount or principal, R is the rate of interest that is applicable per annum and N is the number of monthly installments/ loan tenure.
In case you do not wish to calculate the EMI manually or using online EMI Calculator applicable on your loan, another alternative is to use Excel. EMI calculation on Excel is very easy and the formula used is very simple.
Loan Calculator Excel
In the Excel sheet, choose a cell and enter the following formula:
- Rate stands for rate of interest applicable on the loan
- NPER stands for total number of monthly installments/ loan tenure
- PV stands for present value/ loan amount/ principal amount
- FV stands for future value or cash balance once last payment has been made. This can be omitted and the value will be counted as zero (0).
- Type is zero (numerical 0) or 1 – this indicates when the payment is due. If payment is due at the end of the period, the type will be equal to zero. If the payment is due at the commencement of the month, then the type will be set as 1.
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:
- 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.
- 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.
- 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 payable monthly installment amounts.
- 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.
Why should you calculate your EMI?
There are a number of benefits to calculating your EMI amount before applying for a loan:
- It can reduce your chances of defaulting by helping you manage your finances better.
- You can compare the rates from different lenders and choose the one that best suits your needs.
- You will be able to choose the loan amount and tenure depending upon your requirement and repayment capability.
- There will be fewer chances of your loan getting rejected due to exceeding your repayment capacity.
- You can maintain a better credit history by managing your loan in an optimum way.
Things to Know :
- Other charges such as taxes, late payment fees, prepayment charges, processing charges, etc. that might be included in the total loan expense will not be projected in this calculation.
- The rate of interest will be calculated on a monthly basis and not on an annual basis. Thus, the annual interest on loan should be converted to monthly rate of interest using the following method: Annual Interest Percentage divided by 12. For example, if the annual interest rate is 12%, then the monthly interest rate = 12%/12, i.e., 0.01.