Loans are a very important part of our life as they get us close to some important life goals which could include buying a new property, education, marriage, etc. EMI’s are equated monthly installments that are made towards the loan we opt for. It’s a contribution made for both interest and principal amount. Usually, the interest amount constitutes the major portion of the EMI but as the loan tenure progresses, the amount of interest repayment reduces, and contribution towards principal repayment increases. The EMI of the loan depends on 3 factors which include:
- Loan Amount- The total amount that has been borrowed by the borrower
- Interest Rate- Rate at which interest is charged on the amount that has been borrowed
- Tenure of Loan- Agreed Loan repayment time-frame between the borrower and the lender
There could be multiple reasons for varied EMI’s payments and one of them includes the type of loan in itself. When there are fixed-rate loans, the EMI rate remains constant during the loan tenure, & in case of floating rate loans, the interest rate will vary which would e based o the prevailing market rate. The EMI payments as a result will vary when there would be a change in the base rates. Another set of factors that affect the payments made for EMI is the partial closure or the pre-closure that is made towards the loan. This will result in a reduction of the total interest that is to be paid.
EMI’s are quite beneficial as one can pay the amount which is borrowed in parts & it reduces the pressure on the borrower financially. It’s not preferable always for people to pay a lump sum amount of money at once.
A huge section of society dreams of affording to buy expensive things such as a home, car, etc and this won’t be possible if all payments are made at once. Hence, EMI’s are an advantage to pay little over the entire tenure of loan & hence, repay the amount borrowed in full.
People, by and large, can be confused about how much are they supposed to pay as EMI’s & if the lender is levying the right amount. Hence, an EMI calculator is a must in situations where one needs clarity on this front. There are online EMI calculators available where one can calculate monthly emi & we can also make use of a popular Microsoft application called MS Excel or use a formula.
Using Excel, the function for calculating the EMI is PMT. We make use of three variables which are the rate of interest (rate), the number of periods (nper) and, the value of the loan or present value (pv).
The formula which you can use in excel is = PMT (rate,nper,pv).
Another way of calculating is using a formula which is EMI= [PXRX(1+R)^N]/(1+R)^N-1], where P stands for Principal or Loan Amount, R is the rate of interest per month [If the interest rate is 10%, the rate of interest will be 10/(12X100)], & N is the number of monthly installments.
Generally, EMI calculator will ask the person to enter the loan amount, the loan type (Personal Loan, Home Loan, Car Loan), the Loan Period & the Interest Rate. The EMI calculator will provide you will the total amount payable, the total interest payable & the EMI payable. Usually, a table is also made available after the above calculations where the amount of EMI which will be paid for different durations (year wise) along with the loan amount is also mentioned.
What are the advantages of the EMI Calculator?
- One can change the loan tenure & interest rate for the calculator of the EMI which would help you gauge your affordability to pay on a monthly basis.
- EMI calculator can help determine what the EMI would be before taking the loan that can make planning for the month and on an overall level of your finances easier.
- One can make errors while putting the formula on excel or during calculations hence, EMI calculator can give accurate information without any scope for wrong calculations or errors.
- Many of the online EMI calculators give the opportunity to view or download the entire amortization schedule which makes it easy to determine the interest, principal repayment over the complete of the loan.
- During loan repayment, if you come across a lender with a lower interest rate, you can use the EMI calculator to get an understanding of the differences between the overall cost & monthly payments. This can help you to as a result even switch lenders, if the need arises, through a balance transfer.
- The EMI calculator helps save a lot of time and resources as one can independently understand and decide what amount to borrow & the monthly obligations one needs to comply with. After entering a few values in the calculator, one can get results in a matter of a few seconds.
- Understanding the business jargon or straightforward financial terms at times get a bit difficult, & using the EMI calculator can make it easy for the borrowers to understand the monetary features of the loan easily.
EMI calculator is a handy tool but a thorough amount of research is recommended before opting for a loan.