Personal loans are all the craze now. If you have been thinking of taking a loan for some time now, the chances are that you have come across a personal loan advertisement at least once. One question which must be pondering your mind is how the EMIs of a personal loan is calculated? If you have been looking for the answer to the above question, this article is for you as we will be discussing everything you need to know about personal loan EMI calculation. Thus, without further ado, let’s get started.
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, which stands for Equated Monthly Installments, can be understood as a form of monthly repayment by the borrower, contributing to both the principal amount of the loan and the interest amount it collects over time.
Since most loans follow an annualized interest pattern, the lender takes this into account along with the total tenure of the loan to calculate the total repayment the borrower needs to make and accordingly divides it into monthly payments over a fixed 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.
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.
In simple terms, a loan amortization schedule can be understood as a tabular or graphical representation of the loan along with the repayment schedule and EMI amount listed for the entire tenure.
No matter which type of loan you take, the loan amortization schedule will be shared with you by the lender such that you as the borrower can be informed of the EMI payments you are deemed to make in the future, and also plan your personal finances on the side.
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.
In instances where the borrower wants to foreclose a loan, the loan amortization schedule proves to be immensely helpful as it helps both the borrower and the lender accurately calculate the amount that needs to be paid.
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.
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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.