A loan is a financial agreement made between two parties that is a lender and a borrower. Under this agreement, the lender lends a specific amount of money to the borrower with an intention that the amount that is borrowed is returned back with an interest as monthly instalments over a predetermined period (of up to 5 years) by the borrower of the loan.
An equated monthly instalment (EMI) is a fixed payment amount that is made by a borrower to a lender on a specified date for each calendar month. EMIs are used to pay off both interest and the principal amount each month so that over a specified period of years, the loan is paid off completely. In case of, Home Loans, the borrower make fixed periodic payments to the lender over the period of several years (of up to 30 years) with the aim of returning the complete loan.
The EMI calculator is the easiest way to determine your monthly payouts for a period and balance your budget as per the plan. Everyone needs a loan at some point in time in their life whether for buying a car or a house, or funding their child's education or consolidating debts and so on. Thus, loans have become a vital part of everyone's life in today's time. Loans can be taken for a number of purposes, but the key components on loans are always the same that is - loan amount, loan tenure, and the interest rate.
The EMI can be calculated using the flat rate or the reducing balance method.
The EMI flat rate formula is calculated by totaling the principal loan amount and the interest on the principal amount. The sum is divided by the number of months within which the loan has to be repaid.
The EMI for reducing balance method is calculated using the following formula: (P x I) x ((1 + r)n)/ (t x ((1 + r)n)- 1)
P is equal to the borrowed principal amount, I is the annual interest rate, r is periodic monthly interest rate, n is the total number of monthly payments and t is the number of months in a year.
EMIs can also be calculated using the Excel spreadsheet. In Excel, you need to use the function PMT for calculating EMIs.
The formula, which calculates EMI in excel sheet, uses the following syntax: PMT (rate, nper, pv).
The variables in the above formula are:
Rate - Interest rate for the loan
nper - the total number of payments for the loan
pv - Present value/principal
EMIs can be calculated by using EMI calculators available online on websites like MyMoneyMantra. EMI calculators require certain parameters to be input by the user for determining the loan EMIs, which include:
Loan Amount The actual amount borrowed as a loan for purchasing the house, car or any other requirement is the principal amount. It depends upon a number of factors related to the applicant and the cost of the purchase. The interest is applied on the principal loan amount. The higher the amount of loan, higher is the EMI, which you will pay monthly.
Tenure of the Loan The total time period of repayment of the loan is the tenure of the loan. Loan tenures vary depending on the kind of loan, the loan principal and also the lender you are borrowing the loan from. For instance, Personal Loans have shorter tenure up to a maximum period of 5 years whereas Home Loans are longer ones which can go up to 20-30 years. The longer the tenure of the loan, the more will be the interest that you will have to pay along with higher EMIs.
Interest Rate The rate at which the interest is charged on the amount lent to the borrower. It is best to compare the interest rates that are offered by different lenders for a particular loan. The EMI also varies according to the type of interest rate charged on the loan whether it is fixed, floating, or hybrid.