Personal loans are very popular right now. If you’re thinking about getting a loan, you’ve probably seen an ad for a personal loan. One question you might have is how the monthly payments (EMIs) for a personal loan are calculated. In this article, we’ll explain everything you need to know about how to do personal loan EMI calculation. Let’s dive in!
Personal Loan EMI Calculation
Hope you understand the basic definition of a personal loan; let us dive deeper and explore how to perform personal loan EMI calculation.
EMIs stands for Equated Monthly Installments. It can be understood as a form of monthly repayment by the borrower. Also, it contributes to both the principal amount of the loan and the interest amount it collects over time.
Loans usually have interest added each year. To work out how much you need to pay back, the lender combines this with the loan duration and divides it into monthly payments over a set period.
One of the most common aspects of personal loan EMI repayments we often fail to understand is that the borrower contributes more to the interest amount and less to the principal amount at the beginning of the EMI repayment. As they proceed in the journey, the equation reverses.
In most loans, the EMI amount remains the same throughout the loan tenure, ensuring that the borrower can quickly repay their loan while managing their personal finances.
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Personal Loan Amortization Schedule
Now that we know the basic definition of personal loan EMI, let us explore some of the financial jargon in place, with the first one being Loan Amortization Schedule.
A loan amortization schedule is a table or chart that shows the repayment schedule and monthly payment amount for the loan. It helps you keep track of how much you owe and when you need to make payments.
When you borrow money, the lender will give you a schedule that shows how much you need to pay every month. This way, you can plan your finances better.
The Loan Amortization Schedule clearly displays the various breakups within the loan structure. It contains verticals such as tenure of the loan, EMI amount payable, interest rate and interest amount, principal amount, and other charges. A well-arranged glossary of these verticals helps the borrower understand how much loan amount is outstanding and helps the lender track how their investments are performing.
When a borrower wants to close a loan, the loan payment schedule is very useful. It helps both the borrower and the lender calculate the correct amount that needs to be paid.
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Understanding Personal Loan EMI Calculation Process
After getting to know the loan amortization schedule, the next important aspect is understanding the factors that affect the EMI amount and the personal loan EMI calculation that goes behind it.
Three main factors affect the personal loan EMI calculation:
- Principal Amount: Higher the principal amount, the higher the EMI will be and vice versa.
- Interest Rate: A higher rate of interest generally entails a higher EMI amount.
- Tenure: Shorter the tenure of the loan, the higher will be the EMI amount.
Personal Loan EMI Calculation Formula
Lenders across the country use the following standard formula for calculating the EMI of a personal loan EMI,
EMI = P × r × (1 + r)n/((1 + r)n
- P stands for the principal amount
- r stands for the rate of interest, and
- n stands for the tenure of the loan (calculated in months)
Personal Loan EMI Calculation Example
Let us understand this better with the help of an example.
If the principal amount is ₹200,000 and the rate of interest is 5% for a tenure of 60 months, the monthly EMI payable will be ₹3,774.25.
Considering both the EMI formula and the example shared, it is evident that the EMI amount is directly proportional to the principal amount and interest rate, while it is inversely proportional to the loan tenure.
However, one of the most significant aspects to note here is that the personal loan EMI will remain constant throughout the loan tenure if the loan arrives with a fixed interest rate.
On the other hand, if the loan arrives with a floating rate of interest, the personal loan EMI amount will likely vary regularly to meet the new rhythm of interest.
Understanding the personal loan EMI calculation or EMI payments in lending instruments, especially personal loans, will help you better understand the workings of the loan and take active control of your personal finances.
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Featured Photo by Karolina Grabowska