How is EMI calculated on my personal loan?

Posted by KushiBL on March 25th, 2020

How is EMI calculated on my personal loan?

Expanded as Equated Monthly Installments, EMI is often the source of confusion. More than confusion, it’s often anxiety over the amount paid. Besides getting a personal loan at the right time, you can reap better benefits without any push or pull of approval through Buddy Loan, one of the best loan aggregators.

Doubts arise over the lender’s interest charging criteria. Lack of clarity on the computation method of EMI may also deter people from taking personal loans. The following information discusses the calculation method of EMI. Knowing how much interest is charged, and how much is going towards repayment of the principal is every borrower’s right.

Some salient points about EMIs

• EMIs are dependent on the amount of loan taken, rate of interest and the loan period.
• EMIs are decided on the date of loan sanction and never change during the tenure of loan repayment.
• Interest component and principal component constitute the EMI.
• EMIs paid in the initial part of the repayment schedule have a substantial portion that goes towards the overall interest on the loan computed based on the loan period and per annum rate of interest. In the later years, the portion of the EMI towards repayment of the principal component becomes higher and the interest component lower.
• Those who have opted for floating interest rates can experience a change in EMIs.

Types of EMI

Pre EMI – Given in stages for construction of home.

• Disbursed in phases for in-development projects or under-construction homes
• Pre EMI installments are levied on the loan disbursed. By the time of completion of the project, the entire loan is disbursed. Pre EMI is applicable within this period.

Tranche – Borrower pays the complete EMI

• Borrower pays the complete EMI even if the complete loan for the under-construction project is not disbursed.

Accelerated – Borrower expedites repayment of loan

• A facility available only with select financial institutions, the borrower is allowed to repay more than the EMI amount to repay the loan faster and reduce the tenure.

How is EMI calculated?

The formula for EMI calculation is as follows:

[Principal x Rate of Interest Per Month x (1 + Rate of Interest Per Month) ^ Number of Monthly Installments / (1+ Rate of Interest Per Month) ^ Number of Monthly Installments - 1]

Let’s calculate the EMI for a loan of 15 lakhs with an interest rate of11.99% per annum with a loan tenure of 5 years.

• Rate of interest per month is = 11.99 / 12 x 100
• ^ is to the power of

1500000 x 0.00999 x (1 + 0.00999) ^ 60 / (1 + 0.00999) ^ 60 – 1 = 14984

Every month installment for this loan will be Rs. 14984