The Equated Monthly Installment (EMI) is a monthly fixed payment the borrower makes to the lender (banks/financial institutions). An EMI payment is a necessary component of a loan. Generally, calculating the EMI amount is a difficult task. The EMI calculator makes calculating the EMI amount quicker and simpler.
What Is An Equated Monthly Installment (EMI)?
The Equated Monthly Installment (EMI) is the monthly amount due to the lender (bank or other financial institution). Using EMIs, the borrower makes monthly principal and interest payments until the entire loan balance is repaid.
A loan is a financial agreement between a lender and a borrower. The total principal amount and interest are divided by the number of months over which the loan must be repaid. An EMI calculator helps in calculating monthly payments. Usually, in the first few months, EMI payouts are higher and gradually decline with each payment.
The principal amount, the interest rate, and the loan’s term are the three most important variables when calculating an EMI. These three factors influence the variation in each loan’s EMI. Therefore, it is essential to understand these three parameters prior to selecting a particular loan.
Users can calculate their loan EMI using a mathematical formula, excel, or an online EMI calculator. The EMI calculator is the simplest and quickest method for calculating the loan’s monthly payment.
How Does A Loan EMI Calculator Work?
The loan’s EMI can be quickly calculated with the help of the loan EMI calculator. They change a hard calculation into a simple one. The calculator is based on a direct formula:
EMI = P * (r*(1+r)n)/((1+r)n-1)
- P represents the principal.
It is the loan amount granted to the borrower by the lender. It could be for a house, a vehicle, or any other purpose. The loan amount is determined by the cost of the purchase. The higher the loan amount, the higher the monthly payment. The interest is calculated on the principal amount. In the ‘Loan Amount’ field of the EMI calculator, the principal amount must be entered.
- r represents interest.
It is the interest rate charged by the lender on the principal loaned. The interest component of a loan varies depending on the lender and the type of loan. It is always advisable to compare the interest rates offered by various lenders before choosing a lender for a particular loan. The interest rate must be entered in the “Interest rate” field in the loan EMI calculator.
- n is for the loan duration.
It is the period of time allotted for loan repayment, including interest. The loan term varies based on the loan type, principal amount, and lender. A car loan may last up to ten years, whereas a mortgage loan will be longer. The longer the term, the higher the interest paid and, consequently, the higher the EMI. In the ‘Loan Period’ field of the loan EMI calculator, the term must be entered.
Factors Affecting Loan EMI
A loan’s EMI is affected by a number of factors. Usually, these factors do not affect short-term loans, but long-term loans, such as home loans, are affected. The main reason for this could be that home loans are based on the constantly fluctuating MCLR (Marginal Cost of Lending Rate).
- Change in the interest rate during the loan tenure
There are generally three interest rate options available for loans: fixed, floating, and hybrid. In a loan with a fixed rate, the interest rate and monthly payment remain constant throughout the loan’s term. With floating rates, both the interest rate and the EMI amount fluctuate over the course of the loan in accordance with market conditions.
It’s possible for there to be no change at all, as well as positive or negative changes. The hybrid interest rate regime is a combination of floating and fixed rates. Generally, the initial interest rate on a loan is fixed, and as the loan term progresses, the interest rate becomes variable. Whenever the Reserve Bank of India (RBI) modifies the standard interest rate, it has an effect on the loan EMI interest rate.
- Prepayment of the Loan Amount
Prepayment of a loan can undoubtedly affect the total amount of EMI payments. Most banks typically permit partial or full prepayment of loans with some prepayment penalties, typically in the range of 1 to 3 %.
Any payment made that exceeds the monthly instalment is regarded as a prepayment. By prepaying a loan, both the principal balance and the monthly payment are reduced. However, prepayment is permitted only under the lender’s terms and conditions.
- Change in Loan Duration
Similar to a home loan balance transfer, banks allow their customers to switch from an old loan tenure to a new loan tenure. Accordingly, the EMI will increase or decrease. Changes in the duration have a significant effect on the EMI amount. Generally, the longer the tenure, the lower the EMI; the shorter the tenure, the higher the EMI. Consequently, it is crucial to consider all factors, and after using the EMI calculator, one must decide whether to modify the loan’s duration and balance transfer.
- Loans with Flexible Repayment Options
A feature of varying EMIs is provided by some banks. This includes both step-up and step-down loans. Step-up loans are loans in which the monthly payment is lower during the initial years of the loan and gradually increases as the loan’s term progresses.
These are appropriate for individuals in the early stages of their careers. Step-down loans are those in which the monthly principal and interest payment (EMI) is relatively high during the initial years of the loan but decreases over time. These are appropriate for individuals who are nearing retirement.
Types Of EMI Calculator
Individuals can calculate their equated monthly instalments for home loans, personal loans, car loans, etc. using a variety of EMI Calculators.
-
Home Loan EMI Calculator
Given the high cost of real estate in India, it can be difficult to purchase a home without external sources of finance. A growing number of prospective homebuyers are selecting this type of credit to finance their home purchase. The primary duty of prospective borrowers is to have a precise idea of the EMI amount they are obligated to pay. One can use a home loan EMI calculator to determine the exact amount.
The Equated Monthly Installment, or EMI, is a fixed monthly payment that a borrower must make to the lender until the end of their loan term. For first-time buyers, calculating the EMI and its components can be a cumbersome process. A home loan EMI calculator in India can perform these complex calculations quickly, saving individuals the trouble of doing them manually.
Home Loans Types
- Home Loan: This is the most prevalent type of home loan used to buy a home. Numerous housing finance companies, public banks, and private banks offer housing loans in which individuals borrow money to purchase a home and repay the loan in monthly instalments.
- Loan for Home Construction: If individuals already own a plot of land and need financing to build a home on that land, this is the right type of mortgage for them.
- Home Extension Loans: Home extension loans provide the necessary funding to individuals who already own a house and want to add another room or floor to accommodate their growing family.
- Home Improvement Loans: A home improvement loan provides funding for renovating or repairing the house if there is a flaw in the existing system, such as interior or exterior painting, plumbing, upgrading the electrical system, waterproofing the ceiling, and more.
- Home Loan Balance Transfer: Individuals can transfer the outstanding balance of their home loan to a different lender who offers a lower interest rate and better service if they are dissatisfied with the current lender’s service or the current home loan’s interest rate is too high. Upon transfer, individuals can also investigate the possibility of a top-up loan on the existing one.
- Composite Home Loan: This type of home loan provides funding for the purchase of the land on which individuals intend to build a home as well as the construction of the home.
-
Personal Loan EMI Calculator
A personal loan is an unsecured credit offered by financial institutions based on employment history, repayment ability, income level, occupation, and credit history. A personal loan is a versatile loan that can be used for any immediate need. Personal loans are typically obtained for a variety of purposes, including medical emergencies, vacations, relocations, weddings, and home improvement. They have a relatively higher interest rate and a shorter term because they are unsecured.
What are the advantages of using a personal loan?
In contrast to other types of loans, such as home loans and gold loans, for which individuals must provide numerous documents, personal loans require fewer documents. and has a swift approval process. With numerous financial institutions providing personal loan online services, the loan amount can be disbursed within a few hours if the lender is confident in the individual’s ability to repay.
Another important aspect of personal loans is that the lenders give the option to choose the loan term. Typically, personal loan terms range between one and five years. Therefore, individuals can choose the loan term based on their capacity for repayment. As with any other loan, however, defaulting on a personal loan has its own negative repercussions, as it would be reflected in the credit report and create difficulties when individuals apply for credit cards or other loans in the future.
Typically, it is disbursed within seven business days of the lender’s receiving the loan application. Once approved, individuals may receive an account payee cheque/draft in the amount of the loan, or the funds may be electronically deposited into the savings account.
Although loan sanctioning criteria may vary from bank to bank, the maximum loan amount that can be sanctioned to an individual is largely determined by their credit score, current income level, and liabilities. A high credit score (closer to 900) indicates that individuals have serviced their previous loans and/or credit card payments in a responsible manner, resulting in the approval of a larger loan amount.
The current level of income and liabilities (outstanding credit card balances, unpaid loans, outstanding EMIs, etc.) have a direct bearing on the ability to repay. Therefore, if an individual has a low income or a substantial amount of unpaid credit card bills or loans EMI, they will be approved for a smaller personal loan amount than those with a higher income or fewer financial obligations.
Documentation required to apply for a personal loan
Although the required documentation varies from lender to lender, the following are some of the most important documents individuals must submit with their application:
-
- Proof of income (salary slip, bank account statement, ITR forms)
- Proof of residence and proof of identity.
- Official copies of the degrees and license (this is usually applicable only for self-employed applicants).
-
Car Loan EMI Calculator
The money borrowed from a lender solely to buy the car of one’s choice is referred to as a “car loan.” Consumers can obtain auto financing in the form of new and used car loans from banks and non-banking financial companies (NBFCs). Car loans are available for nearly all passenger and commercial vehicles on the market, from luxury sedans to hatchbacks. A car loan is repaid with interest through equated monthly instalments (EMIs) over the loan’s duration.
The applicant must submit income proof (usually, the latest bank statements, last 3 months’ payslips, and IT returns), age proof (birth certificate and 10th or 12th school certificate), identity proof (PAN, Passport, Aadhaar card, Voter’s ID or Driving License), and address proof (ration card/utility bills such as telephone or electricity bill) along with a properly filled and signed car loan application form to the bank.
The bank will verify the applicant’s information and process the loan application. The loan amount will be transferred immediately to the applicant’s bank account upon approval.
How Can An Online EMI Calculator Be Of Help and Support?
Before obtaining any type of loan, whether it be a secured or unsecured advance, individuals must be aware of the EMI amount. Thus, an EMI calculator in India can be of immense help. It provides an accurate estimate of the EMI amount, allowing individuals to plan their finances appropriately.
A loan EMI calculator helps individuals save valuable time. It’s not necessary to perform intricate calculations manually, which can take a lot of time. It eliminates the possibility of a miscalculation and always provides an accurate estimate.
It is specific to each loan type. For instance, the EMI breakdown of a home loan differs from that of a personal loan.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Watch/hear on YouTube:
Start investing through a platform that brings goal planning and investing to your fingertips. Visit Kuvera.in to discover Direct Plans and Fixed Deposits and start investing today.
#MutualFundSahiHai #KuveraSabseSahiHai!
