With the ever-rising prices in India, there might hardly be anyone who hasn't taken a loan in their lifetime. Whether to buy home, car or even to go on a vacation, people need loans to support their dreams, fulfill their lifestyle choices and meet other financial requirements, which if depended on your monthly salary might be impossible to achieve. Loans also come in handy when people need it the most such as during a medical emergency. No matter what your financial requirements are, you will always find a specific loan for it. But getting a loan is not the end of the story as it also comes with a liability of repaying it on time. A single incomplete, missed or late loan repayment can harm your credit score notably. Therefore, borrowers must always calculate EMI before they take a loan. Doing so gives the borrower an estimation of the amount that they will have to repay every month to the lender. With its help, they can plan their finances beforehand so that neither their monthly budget nor monthly loan installments suffer. To calculate loan EMIs quickly, borrowers can use loan EMI calculators. They may also use dedicated loan EMI calculator for accurate results. For instance, to calculate EMI for a business loan, it is best to use business loan EMI calculators instead of a home loan EMI calculator or other EMI calculators.
People who are wondering what a home loan calculator is, read on. But before that, we will first learn about EMI as it is an important component of a loan.
What is an EMI?
For those who are not well acquainted with this term, an EMI is an abbreviation for Equated Monthly Instalments. It is an important term that you will come across every time you apply for a loan. It is basically a predetermined amount that a borrower is liable to pay to its lender at a specified date every month till the entire loan amount gets paid off. This amount is mutually decided and agreed by both borrower and lender before a loan is sanctioned.
Besides the loan amount, borrowers are also liable to pay interest calculated on the loan amount. Since the interest is charged every month, therefore, your loan EMI is made of two components, principal amount and interest amount.To ensure that your loan does not get you into trouble, pay your EMIs on time. You can pay it either through auto debit instruction or through cheque, which will be required to send every month without fail.
How are EMIs calculated?
To calculate a loan EMI, three elements that hold utmost importance are loan amount, tenure and rate of interest. An EMI is directly proportional to the rate of interest offered on the loan amount and inversely proportional to the loan tenure. This further means that higher the rate of interest, higher will be the EMI and longer the tenure; lesser will be the EMI.
If you have values of these three elements, then we can proceed on learning to calculate loan EMI. The formula or mathematical expression used to calculate EMI is:
EMI = [P x R x (1+R)^N]/[(1+R)^ (N-1)],
P = Principal amount
R = Rate of Interest
N = Number of Instalments
You can use this formula to calculate your loan EMI manually or using an Excel sheet. If you're looking for an easier and faster method, then use an EMI calculator.
What is an EMI calculator?
It is an online tool that can be easily found on the internet under dedicated names such as personal loan EMI calculator, home loan EMI calculator and so on. For instance, if you want to calculate EMI for home loan, you can search on the internet using 'home loan EMI calculator India' keyword and choose whichever website you think is good. There are several banks and other third party's websites' free tools like loan eligibility calculator and loan EMI calculator that let you know the amount of EMI that you would have to pay every month once you get your loan disbursed.
Why using an EMI calculator before getting a loan is important?
A loan is a privilege which comes with a responsibility of repaying it back on time. At times, people lose this privilege because they do not repay their loan installments on time. Barring a few exceptions, these defaults can be avoided by calculating your EMI beforehand and planning your monthly expenses accordingly so that when you take a loan you do not miss out on your loan repayment. Since EMI calculator is the fastest and the most accurate way of calculating your loan EMIs, therefore, using it before applying for a loan helps you:
- Plan your finances beforehand
Using EMI calculator before applying for a loan helps you in forecasting the EMI that you will have to pay to your lender. Knowing EMI beforehand helps in making financial provisions accordingly so that you can pay loan installments without a miss. It also saves your monthly budget from taking a hit during the loan tenure.
- Compare different loan offers
If you have shortlisted a few offers on a loan, it is worth taking a closer look to get the best deal. When comparing different loan offers make sure to look beyond the rate of interest. Sure, the rate of interest is an important consideration but there are other variables also such as the processing fees and foreclosure charges that must also be given equal importance to get the best deal.
- Decide loan tenure and principal amount
Using loan EMI calculators, you can calculate EMIs for different loan offers. You can adjust the values of the principal amount, rate of interest and tenor as many times as you want to see which EMI will be the most suitable for you. This also helps in selecting an appropriate value for both principal amount and tenure before you apply for a loan.
An important point to note is that even though you're calculating your EMI beforehand but after you take a loan, it may change over time. The possible reasons for this are:
- If you prepay a certain amount on your loan, your loan's principal amount will decrease, which in turn will change the interest calculated and thus will reduce the EMI.
- If you had taken a loan on floating rate of interest, then your EMI will fluctuate as per the change in interest rate.
- If you request your lender to increase the loan tenure then also your loan EMI will decrease.
(This post has been contributed by Paisabazaar.com)