Planning To Take A Personal Loan? This Is How To Calculate Your EMI

A personal loan is a convenient financial tool that helps you meet urgent expenses, whether for medical emergencies, home renovations or weddings. But before applying for one, you need to find out how much you would be repaying every month. This is where equated monthly instalments (EMI) come into play. Knowing your EMI in advance allows you to plan your finances better and avoid unnecessary financial stress.

EMI stands for Equated Monthly Instalment, which is the amount you need to pay to the lender every month until the personal loan is fully repaid. It consists of two components:

• Principal amount: The actual loan amount borrowed

• Interest: The cost of borrowing the loan

Each EMI payment contributes towards reducing both the principal and interest over the loan tenure.

Your EMI can be calculated using the formula: [P x R x (1+R)^N] / [(1+R)^N-1]

In this formula:

• P is the principal loan amount

• R denotes the monthly rate interest (it’s the annual rate divided by 12)

• N is the loan tenure in months

For example, if you take a personal loan of Rs 5 lakh at an annual interest rate of 12% for a tenure of 3 years, or 36 months, your EMI can be calculated using the formula:

EMI = [P x R x (1+R)^N] / [(1+R)^N-1]

Here:

• P: Rs 5,00,000 (principal loan amount)

• R: 12% annual interest / 12 = 1% monthly interest (0.01 in decimal)

• N: 3 years × 12 = 36 months

Substituting the values: [5,00,000 x 0.01 x (1+0.01)^36] / [(1+0.01)^36 - 1]

After calculation, the EMI amount will be around Rs 16,607 per month.

Instead of manually calculating your EMI, you can use online EMI calculators available on various bank and financial websites. These tools are easy to use. You just need to enter the loan amount, interest rate and tenure to get instant results.

There are a few factors that influence the EMI amount:

• Loan amount: Carefully consider the loan amount you need, as higher amounts would lead to higher EMIs.

• Interest rate: A higher interest rate increases the EMI, making the loan more expensive.

• Loan tenure: A longer tenure reduces EMI but increases total interest paid over time.

• Opt for a longer tenure: This reduces EMI but increases total interest payable.

• Negotiate for a lower interest rate: A lower rate reduces your EMI burden.

• Prepay whenever possible: Partial prepayments reduce outstanding principal and future EMIs.

In conclusion, before taking a personal loan, it’s important to calculate your EMI and ensure that it fits within your budget. A well-thought-out loan repayment plan will help you manage your finances better.