How is the Loan EMI Calculation Done?

How is the Loan EMI Calculation Done?

People who have taken loans from the banking system are familiar with the term Equated Monthly Instalment (EMI). However, not many people know the concept of the EMI and the calculations that determine your EMI. Let us understand the concept of the EMI and also look at how to calculate the EMI.

The EMI Concept

EMI stands for “Equated Monthly Instalment.” The EMI is a widely accepted form of repayment of any loan. The EMI has an interest component and a principal component. A part of the EMI goes towards servicing of the interest,and the remaining portion caters to the principal repayment. Therefore, one thing is certain. The EMI of any loan has to be more than the regular interest charged to the account during the month. If it were not so, the EMI would be insufficient to repay the interest portion.

How do you calculate the EMI?

Nowadays, you do not have to lose sleep over the calculation of the EMI. You have the EMI calculators doing this job for you. All you have to do is to feed the following three bits of information into theOnlineEMI Calculator.

  • Loan amount
  • Rate of interest
  • Repayment period

The interest compounding factor

Banks in India charge compound interest on the loans they provide. It entails that they charge interest on the interest. Therefore, every repayment goes towards liquidating the interest first before reducing the principal amount.

When your bank approves your Home Loan offer, it provides you with an amortisation table. It is nothing but an EMI chart. It shows the bifurcation of the EMI into the interest and principal components. A study of the amortisation chart will help you understand the concept of EMI better. You will see that a significant portion of your EMI goes towards servicing the interest charged by the bank every month. Any surplus over the interest amount goes towards reducing the principal amount. Therefore, you find that your Home Loan takes a long time to decrease substantially.

How do you check whether the EMI is right or wrong?

Your Home Loan sanction letter contains the details of the EMI you have to pay. Are there any means to check whether this calculation is right? Yes, there are ways to do so. The easiest way is to check up the Home Loan EMI calculator available everywhere on the internet. You can also check out your EMI on the websites of home loan providers like MyMoneyMantra.

You can verify your EMI using the method described above. However, how do you know it is correct? There are two ways of doing the calculation manually.We shall look at both the formulas in brief.

The Excel Way

If you are familiar with the functions of MS Excel, it is easy to verify the EMI. In Excel, the function for calculating the EMI is PMT. The calculation requires three variables:

  • The rate of interest (rate)
  • Number of instalments (nper)
  • Value of the loan (pv)

The formula is a straightforward one. The EMI = PMT (rate,nper,pv)

 Note that the rate should be the monthly rate of interest and not the annual percentage. Hence, if the annual percentage is 12%, the monthly rate translates to 12%/1 = 1% or 0.01. Input the details,and you get the answer in red. In Excel parlance, it indicates the cash outflow of the borrower.

The Manual Method

Using an Excel sheet is not possible all the time. Under such circumstances, you have to rely on your mathematical calculators. The formula is an easy one.

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

P stands for the loan amount

R = Rate of interest per month

N = Number of monthly instalments

Using this formula, you can cross check whether the bank has stipulated the right amount as instalments.

What are the factors that can affect the EMI?

In the regular course, the repayment of the loan starts one month from the disbursal of the loan. Under such circumstances, there is no moratorium period. You can use the EMI calculators available on the internet as well ascross-check using the methods described above.

However, not all loans behave in the same manner. You have Home Loans that come with a moratorium period ranging from 12 to 18 months. Under such circumstances, banks follow either of the two procedures described below.

  • Calculate the interest for the moratorium period and add it to the principal amount before calculating the EMI.
  • Alternatively, banks stipulate pre-EMI payments where you service the interest portion of the loan monthly. Therefore, the principal amount remains the same on the day your EMI starts. Consequently, it becomes easy to use the EMI calculator.

Such situations can arise when there is part-disbursement of the Home Loan (disbursement in stages).

You have to note a critical point here. When you miss the repayment of any EMI, it is always better to pay it as soon as possible. Delaying the repayment of a missed EMI can have a drastic effect on the loan repayment schedule. It is because the banks charge interest on the interest. The sooner you clear off the missed EMI, the better it is for you.

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