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How to calculate EMI for loans?

By Seema

EMI is an abbreviation for Equated Monthly Instalment. It is a fixed amount that a borrower has to pay every month to the bank for the entire loan term to pay off the loan amount. An EMI constitutes of the interest amount and the principal amount wherein the interest component constitutions the major portion of the EMI at an early stage of your loan. But as the loan descends, the principal component forms the major part of the EMI.

When applying for any loan, one must calculate the EMI in advance for the reason that:-

  1. It gives an idea of how much money you need to pay towards the loan EMI every month.
  2. It helps individuals choose the loan amount wisely as per their EMI affordability.

Considering the situation where you want to apply for a loan – be it a home loan, car loan or any other loan, the very first step is to sit and calculate the EMI. And to calculate the EMI, you basically have to decide how much loan amount you need from a lender. In addition to this, you also have to determine the loan term by the end of which you can pay off the loan.

To decide on these factors, you need to sit down and think of your expenses, your liabilities and then settle on the loan amount. On the basis of the loan amount, decide the loan terms and then the EMI. The EMI, loan amount and loan terms are interrelated. If you choose a higher loan amount for less period of time, you’ll end up paying higher EMIs. However, if you borrow less amount of money for a longer duration, you’ll be paying higher interest on the loan.

EMI Calculator - Calculate EMI for Loans

For calculating loan EMI, a loan EMI calculator can be of huge assistance. It is an online tool that will assist you in finding the loan EMI simply by entering a few essential details such as the loan amount, interest charges on the loan, loan term and processing fee.

A loan EMI calculator is simple, efficient and delivers 100% accurate results. It eliminates the need to visit the bank every often for all such calculations.

Benefits of EMI Calculator

The prime advantage of using a loan EMI calculator is that you get to know how much money you will have to pay each month to the bank during the loan tenure to repay your loan without ending up in financial stress. In addition to this, there are several other advantages, which are listed as below:

  • Available at All Times

Since the loan EMI calculator is an online tool, you can access it anytime and from anywhere.

  • Can Use As Many Times

You can use loan EMI calculator as many times as your heart desires. You can vary different values of loan parameters such as loan tenure, loan amount and rate of interest to compare which loan offer fits your requirements.

  • User-Friendly

You don’t need a special course or another person’s assistance to use loan EMI calculator. The tool is user-friendly and allows you to do all the calculations online with a few simple clicks.

  • Time Saving

Calculating EMI all by yourself is time consuming until you’re are really fast and good at calculations. The loan EMI calculator saves your time as in this you just have enter a few values and click a button to get results.

  • Accurate Results

Calculating loan EMI all by you comes with a risk of making mistakes. The loan EMI calculator helps you in making error-free calculations in just a few clicks.

  • Suitable to Calculate EMI of Any Loan

Be it home loan, car loan, education loan, student loan, personal loan or any other type of loan, online loan EMI calculators are perfect to calculate EMIs for any type of loan.

  • Helps in Planning Monthly Finance

The most important reasons why we calculate EMI is so that we know the amount which we are supposed to pay every month after we borrow a loan amount from the lender. Knowing your fixed expenses well in advance help you to plan other financial variables better so that your monthly budget does not take a hit.

How Does It Work?

To calculate loan EMI, all you have to do is enter values such as the loan amount that you tend to borrow from lender, the rate of interest on which lender is offering loan and loan tenure. The loan EMI calculator calculates your loan’s monthly instalment using a basic formula, which is given as follows:-

E = P x r x (1+r) ^ n/ ((1+r) ^n – 1), where

  1. E is the EMI that you will have to pay every month to the bank.
  2. P is the principal component of the loan.
  3. R is the rate of interest that is calculated monthly instead of annually by using the formula, R= annual interest/ 12 * 100. So if you select the loan term of 5 years, n will be 60.
  4. N is the loan term.

This is the most basic formula that almost every loan EMI calculator works on. Apart from helping you to calculate the loan EMI, a few loan EMI calculators may also request you to mention the processing fee. In addition to calculating the loan EMI, some loan EMI calculators even provide the breakup of the entire amount that you will need to pay to the bank through colourful pie charts, graphs, etc. With the help of loan EMI calculator, you can easily calculate how much amount you are paying as an interest on the loan and how much for the principal. In addition to this, you can also get a detailed analysis of loan amortization table. It tells you how much money you have paid at the end of each year. It also explains how much of the initial EMI you have paid as interest and how much is paid towards the principal component.

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