How is EMI calculated on my business loan?

Posted by KushiBL on March 25th, 2020

How is EMI calculated on my business loan?

The EMI on your business loan is the amount you will be paying monthly to your loan lender. This amount is computed to include the interest and the principal amount. You pay steadily fixed EMIs for the tenure of the loan, progressively, reducing the amount of money you owe the bank.

The bank may choose to calculate the EMI using the reducing balance method or the flat rate method. `

However, loan aggregators help you with the best repayment options for a good 5 years. Explore Buddy Loan in order to reap more benefit for a business loan. Meaning more benefits on tax.

Factors that affect the size of your EMI

Change in loan tenure: When your loan tenure is changed, even by a month, it changes the size of EMI. When you want a smaller EMI amount, the tenure is elongated. However, the longer the tenure, the higher the interest rate.

Higher EMI amounts result in a shorter tenure and lower interest rate.

Prepayment of the firsts EMI

When you pay the first EMI in advance, it reduces the size of the principal that you owe the bank. Therefore, as a result, your consecutive EMI amounts will be reduced.

Shifting your loan to a different lender:

Different lenders have different interest rates, and therefore, the amount of EMI will vary.  When you transfer your business loan to a different lender, then your payment changes.

Flat rate method

Principal amount+ interest on the principal       = EMI

Number of periods* number of months

Reducing balance Method 1

The mathematical formula to calculate EMI

P*R*(1+R)^N     =  EMI

[(1+R)^n-1

P   =principal amount

R   =The rate of interest

N   = Number of repayment periods

Method 2

Using an excel worksheet

Using the same variables but the function

PMT=Rate* number of repayment periods* amount of loan

Method 3

Use an online calculator. If you are applying for an online loan, most providers will have an online calculator where you key in the variables and compute your EMI.

The bank computes the interest you pay using two methods. These are:

• Simple interest. This type of investment is calculated only on the amount of loan given out.

Principal* interest rate * the Number of repayment periods.

• Compound interest: In this method, the interest is added back to the amount borrowed for you to calculate the next year's interest

Principal*interest rate= interest for year 1

Principal interest for year 1) * interest rate = interest for year 2

Factors affecting your business loan interest rate

• Amount of interest paid depends on the prevailing bank interest rates
• Your credit score matters a lot
• Late payments cause an increase in your interest rate
• The terms of loan affect the interest rate
• The interest rate is the price you have to pay

These factors will, in turn, affect your EMI. Therefore, it is paramount to be keen on each element as you apply for your business loan.