Borrowing sector of India is growing rapidly. When we want to start a new business, expand our existing business, buy new house, send children for higher education, get children married, we think of taking loan from banks or non-banking financial sectors. Banks give different types of loans like home loan, education loan, personal loan, etc. And we have to repay this loan through EMI, calculated using EMI calculator.

What is EMI?

Equated Monthly Installment (EMI) is a fixed payment amount which borrower has to pay to a lender at a specified date each calendar month. EMIs are typically used to repay both principal and interest over a specific period, usually for loans such as home loans, car loans, personal loans, and other forms of installment-based borrowing.

An EMI consists of two components:

1. Principal Amount: This is the original amount borrowed.
2. Interest Amount: This is the interest charged by the lender on the outstanding loan balance.

The EMI remains constant throughout the repayment period, but the proportion of principal and interest changes over time. In the beginning, a larger portion of the EMI goes towards paying off the interest. When the loan term progresses, a larger portion goes towards reducing the principal amount.

How to calculate EMI?

The calculation of an EMI involves the loan amount, the interest rate, and the loan tenure. The formula to calculate EMI is typically based on the reducing balance method, which considers the outstanding principal after each payment.

The formula to calculate EMI is as follows:

Where:

• EMI = Equated Monthly Installment
• P = Principal Loan Amount
• r = Monthly Interest Rate (Annual Interest Rate / 12 / 100)
• n = Number of Monthly Installments

It’s important to note that while EMIs make repayment more manageable by spreading out the payment over time, borrowers end up paying more in interest over the life of the loan compared to making a lump sum payment.

Let’s take an example where we will calculate EMI. Suppose the loan amount is $10,000 with an annual interest rate of 6% and a loan tenure of 3 years (36 months). Here’s how the calculation would look:

P = $10,000

r = 0.005 {Annual Interest Rate = 6%; Monthly Interest Rate (r) = 0.06 / 12 = 0.005}

n = 36 months

EMI = 10000 * 0.005 * (1 + 0.005)^36 / ((1 + 0.005)^36 – 1) EMI ≈ $299.71

So, monthly EMI would be approximately $299.71.

Please note that this is a simplified calculation and doesn’t take into account factors like processing fees, prepayment options, or fluctuating interest rates. It’s always a good idea to use an online EMI calculator provided by financial institutions or websites to get accurate results tailored to your specific loan terms.

How an EMI calculator can help you?

1. An EMI calculator helps you get an estimate of the monthly instalment you need to pay for a loan. So, you can plan your monthly spendings accordingly.

2.EMI calculators help you in financial planning by giving you a clear picture of your monthly obligations if you take on a specific loan.

3. EMI calculators help you to compare different loan options with varying interest rates and tenures to see which one suits your budget and financial goals.

Pros & Cons of High EMI and Low EMI

High EMI:

Pros:

1. Faster Loan Repayment: Opting for a higher EMI means you will be repaying your loan faster. This can help you become debt-free sooner and reduce the overall interest you pay over the loan term.
2. Lower Interest Cost: With a shorter loan tenure resulting from higher EMIs, the total interest paid over the loan’s duration is lower. This can lead to significant savings in the long run.

Cons:

1. Strain on Budget: A higher EMI can put strain on your monthly budget, as you’ll need to allocate a larger portion of your income towards loan repayment. This might leave you with less disposable income for other expenses and savings.
2. Reduced Flexibility: High EMIs might leave you with less financial flexibility, making it harder to manage unexpected expenses or changes in your financial situation.

Low EMI:

Pros:

1. Lower Monthly Burden: Opting for a lower EMI means a smaller portion of your monthly income goes towards loan repayment, which can ease your monthly budget and provide more breathing room.
2. Financial Flexibility: A lower EMI provides greater financial flexibility, making it easier to manage other expenses and handle unforeseen circumstances.

Cons:

1. Extended Loan Tenure: Opting for a lower EMI typically leads to a longer loan tenure. While this might reduce the immediate financial burden, it also means you’ll be repaying the loan for a longer period, which could result in higher overall interest payments.
2. Higher Total Interest Cost: Due to the extended loan tenure, you might end up paying more in total interest over the life of the loan, even though the monthly payments are lower.

How to Choose the Right EMI:

The choice between a high and low EMI depends on your current financial situation, your long-term financial goals, and your comfort level with monthly payments. It’s generally advisable to go for high EMI as it reduces the interest burden and helps you repay the loan faster if you have a stable income and can comfortably afford a higher EMI. If you have other financial priorities or prefer lower monthly commitments, you might opt for a lower EMI but you should know that it might lead to higher overall interest payments in the long run.

It’s important to carefully assess your financial situation, consider your short-term and long-term goals, and possibly consult with a financial advisor before making a decision on your loan EMI.

FAQ

1. What does EMI stand for?

EMI stands for Equated Monthly Installment and it is the amount that needs to be paid to the lender every month to repay the loan.

2. How are EMIs are calculated?

EMIs are calculated using the simple formula:

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

where P is the principal loan amount, R is the rate of interest and T is the term of the loan.

3. What are some examples of loans where EMIs are commonly used?

EMIs are used for all kinds of secured and unsecured loans including personal loans, home loans, car loans and education loans.

4. How does the interest rate impact the EMI amount and the overall cost of the loan?

The higher the interest rate of a loan, the higher the EMI amount and the overall cost of the loan.

5. Are there any pros or cons to choosing a high or low EMI for a loan?

Higher EMI: Faster loan repayment, the lower interest cost, but a bigger monthly financial burden.

Lower EMI: Greater flexibility, more disposable income, but longer loan tenure and higher overall interest cost.

6. How to choose a right EMI?

The choice between a high and low EMI depends on your current financial situation, your long-term financial goals, and your comfort level with monthly payments.