Availing a home loan has become considerably easier over the past few years. However, if one does not understand the monthly outflow of finances that you need to sacrifice in order to pay of your home loan, it can cripple one financially. Also known as Equated Monthly Instalment (EMI), this must be a comfortable amount to spare for a borrower. Although it is an exceptionally valuable asset to own a home, it should not compromise your lifestyle in the process.
Definition of EMI
An acronym for Equated Monthly Instalment, EMIs are essentially a monthly outflow of money that needs to be paid towards a product, and usually bears two components: principal and interest.
For instance, Mr. Rajiv has purchased a mobile phone on EMI worth Rs.30,000. The EMI payable is Rs.3,000 for a tenure of 10 months.
However, some EMIs include the aspect of interest. In this case, Mr. Rajiv would have to pay a slightly higher EMI of, let’s say Rs.3,300 per month for 10 months. Therefore, he would pay a total of Rs.33,000 for a phone worth Rs.30,000. The plus point is that you can pay this amount over a period, as opposed to paying the entire amount at once.
Principal and interest compound
Although the EMI is constant, the two components inherent in the EMI are not. The two components, principal and interest, vary from time to time. During the initial tenure of the loan, the EMI would comprise mostly of the interest, at the middle of the tenure, you would be paying an equal amount of principal and interest. However, during the end of the tenure the EMI would consist of little or no interest.
Formula to calculate EMI
The formula to calculate your EMI is mentioned below.
EMI = ( P * r * (1+r) n
[(1+r) n – 1]
r = Rate of interest / 12
P = Principal
N = Tenure
Let’s say that Mr. Rajiv obtained a personal loan of Rs.1 lakh, at a 10% interest p.a. for a tenure of 12 months.
Thanks to technology integrated in finance, it is easy to calculate the EMI on a particular loan. Simply visit a site that allows you to use a home loan EMI calculator, enter the basic details of your loan. The site will then mention the total EMI you have to pay towards the loan. Some calculators will also break down the principal and interest aspect of the EMI.
Now that you understand how to calculate EMI, ensure that you understand the financial outflow you need to endure in order to pay off the loan. If the EMI is going to be a burden to you, reconsider your loan option.