Are you thinking of availing a personal loan? Wondering if you would be able to afford the EMI? Read on to find out more .
Personal loans are convenient, require minimal documentation, and are issued much faster.There is also no ask for security or collateral. Similar to all other loans, personal loans are paid back in monthly instalments. EMI is an abbreviation for Equated Monthly Instalment. It is the fixed amount which a borrower pays the lender every single month until the loan is entirely repaid. It is important to note that EMI paid every month is used to repay the principal and interest. EMI help borrowers plan their monthly budget, as the money outflow on loan repayment is a fixed amount. Borrowers can plan various other expenses by first apportioning the money needed towards EMI. Understanding how the EMI is calculated will also help a borrower to know in how many years, and how many equated instalments he will be able to repay the loan.
Key Terms Involved in the Calculation of EMI
The key terms involved in the calculation of EMI are Principal, Tenure and Interest Rate.
Principal
Principal refers to the initial size of the loan. In other words, it is the amount that you have borrowed from the bank. After repayment of the loan starts, the principal reduces accordingly depending on how much you have repaid to date. For example, if you have availed a loan of Rs. 10,00,000, the initial principal is Rs. 10,00,000. After Rs. 3,00,000 is repaid, the principal would be Rs. 7,00,000.
Interest
Interest is the amount charged by the lender for the use of their “asset” by the borrower. In simple terms ,it is the rental or lease charged by the borrower for the use of their money. The interest amount is a percentage of the principal.
Tenure
Tenure is the agreed time frame between the lender and the customer, within which the customer needs to repay the loan amount plus the interest.
Calculating EMI Using Excel Spreadsheet
Excel sheet can be used to calculate EMI easily. It is convenient and is an effective tool. Excel uses the formula PMT to calculate the EMI. To use the formula, click on an empty cell in excel and type the values corresponding to the following formula.
=PMT(RATE,NPER,PV,FV,TYPE)
1) Rate: This is the interest rate. Please note, the interest rate is usually provided as APR (i.e.), Annual Percentage Rate. Any interest rate provided should be divided by 12. Further the percentage should be converted to numeric values. For example, APR of 12% would be 12%/12 which equals 1%.1 % to be input into the RATE field should be 0.01.
2) NPER: This refers to the number of EMI’s applicable for the whole tenure. This value can be obtained by multiplying the tenure value in years by twelve. For example, if the tenure is 15 years, then the number of EMI’s would be 12*15=180
3) PV: This field refers to Present Value, i.e. the Principal Amount. This is the amount that a person intends to borrow.
4) FV: Refers to future value. This field refers to the balance or remainder after the last payment is made. This field can be ignored for calculation of EMI as the borrower intends to repay in full.
5) Type: This field refers to the type of due payment. If the payment is due at the start of the period=1,end of the period equals 0. For calculation of EMI, this value should always be zero.
For sanctioning a loan of Rs. 10,00,000 with a tenure of 4 years and rate of interest of 12%. The values to be input in the formula are as follows.
=PMT(0.01,48,1000000,0,0).
Formula to Calculate EMI Manually
In addition to excel, the next option to calculate EMI is to use a formula. Calculating EMI that goes towards repaying your loan is simple. It is calculated using the formula,
E = {P*R(1+R)^N} / (1+R^N-1}
Here, E stands for EMI, P for Principal, R for the rate of interest , N for tenure in years.
Personal Loan Online EMI Calculator
While the two options mentioned above can be used, it could be a little tedious to work them out. In such cases, we recommend our Personal Loan EMI Calculator. This helps calculate EMI using different plug and play options. This tool is a ready-made option to determine your EMI, depending upon the amount borrowed and repayment tenure.
Summary
While home loan and car loans are to be used for specific purposes, personal loans can be used for any reason. The choice is up to the borrower. It could be a wedding ,a vacation, home renovation, etc. In addition, getting a Personal Loan issued is hassle-free and quick. The Personal Loan, like all other loans, are repaid back using EMI. Equated monthly instalments depend on three key factors (i.e.) Principal, Interest Rate and Tenure. The principal is the amount of money required to be borrowed. Rate of interest is charged annually.
Tenure is the duration for which the EMI is to be paid in order to repay the loan. Understanding these three factors helps increase awareness among borrowers. They can calculate EMI in advance and determine the amount to borrow so that they can plan their finances accordingly.