## Understanding EMI & its Calculation

Equated Monthly Installment (EMI) is basically the amount payable to the financial institution with whom you have a loan. Generally, when you take a loan either with a bank or with a moneylender, the repayment for that particular lending is pre-discussed in the agreement.

EMI is the sum total of principal amount and interest divided by the tenure period (number of months) in which the loan has to be repaid to the lender. Hence, the EMI amount depends on the amount you borrow and on the tenure and has to be paid monthly.

The interest component of your EMI is larger during the initial period and gradually reduces with the passing months and payments made.

## Formula to calculate EMI

EMI = [P x R x (1+R) ^N]/ [(1+R) ^N-1]

Here,

E is EMI

P is Principal Loan Amount.

R is the rate of interest per month, if the interest rate is per annum, then the rate of interest will be – interest / (12 x 100)].

N is the loan tenure period or the duration to repay the loan in months.

## How does EMI calculation help in your planning?

An EMI calculator provides you a clear idea of the amount that you need to pay towards your borrowing in the form of EMI. Thus, an EMI calculator can help you to plan your monthly budget and expenses accordingly considering the outflow towards the loan every month.

An EMI calculator with details also helps you to estimate the loan amount and the tenure period for your loan which is to be availed. Therefore knowing the EMI is very important for calculation your eligibility and planning your budget so that your borrowing journey becomes better!

## What is an EMI Calculator?

An easy EMI calculator is the same as any other calculator which helps one for calculations, but here the calculation made is not the simple one. An EMI calculator helps you calculate the monthly amount you will need to pay towards your Loan.

This calculator can be found easily on the website of online money lenders including nationalized and private sector banks. An EMI calculator also functions as a loan interest calculator, and you can get to know the total interest amount charged, and due interest amount as well if the loan is already ongoing. The functioning of this calculator is simple, the first step starts with entering the loan amount that you want to opt for. The second step is followed by selecting your preferred tenor. And at last, select the loan interest rate advertised on the website. Follow this and you that’s all!

## Factors that Affect your Loan EMI

• Principal Amount– The principal amount is the amount that you want a lender to lend you as a loan. This amount directly affects your EMIs. This means when you apply for a lower principal amount, the EMI charged will be comparatively lower as compared to the one when you apply for a higher loan amount and vice versa.
• Rate of interest– This is the rate at which the lender offers/approves the loan. This is directly proportional to the amount you pay as EMIs for your loan.
• Tenure Period– The tenure period is the time within which you have to repay the loan. Here the case is different, and tenure is inversely proportional to your EMIs. A shorter tenure increases your EMI amount and on the same hand, a longer tenure reduces the EMI amount making it cheaper for you.

## Let us understand all this with an example-

Ayush applies for a home loan of ₹50 lakhs with SBI as the house he liked was of ₹55 lakhs. He was able to meet the eligibility criteria and thus the home loan was approved for a tenure period of 20 years. Till here everything went well, and you will think it’s a perfect case.

But here the problem arises when Ayush got to know that the EMI for his loan will cost him ₹42918. Paying this much as EMI is a problem from Ayush as he has some other liabilities too. Now he has to manage somehow, maybe by cutting down on some of his needs.

In this case, if Ayush would have used the EMI calculator before he would have got a clear idea of the expected EMI and would have planned accordingly. Either he would have selected a house costing a bit low, or the second option was he would have applied for a long tenure.

Summary
Article Name
All You Need to Know about an EMI Calculator
Description
EMI calculator helps you to calculate your equated monthly installments for your home loan, personal loan, business loan, education loan, car loan, wedding loan or any other fully amortizing loan.
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Finance Buddha
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