There are multiple kinds of loans which are available to an individual ranging from housing loan to a car loan satisfying the particular financial need or requirement of an individual. A personal loan is a loan which an individual takes to satiate any urgent personal financial needs. The personal loan is taken by a borrower for the purposes like meeting financial requirement for a wedding, for meeting vacation expenses, for funding medical expenses, etc. Personal loans are unsecured loans in nature which do not need any collateral as a security against the loan amount. Also, such loans are readily sanctioned with the minimal requirement of documentation as compared to the other types of loans.
EMI amount constitutes the principal value and the interest amount for the loan repayment. Initial EMI payments consist of a majority of the value as interest component, and as the tenure shortens, the EMI payments constitute more of principal amount which a borrower has to repay.
The Loan Amortization schedule is the representation of the EMI payment details in a tabular format which acts as a fact sheet for the borrower to scrutinize the loan status. It guides the borrower about the outstanding loan amount, remaining tenure, interest rate and outstanding principal amount status.
There are various ways to calculate the personal loan EMI amount based on the key determinants discussed above. The mathematical formula to calculate the EMI is[P x R x (1+R) ^n] / [(1+R)^ n-1]
Where
P represents the principal loan amount
R represents the rate of interest
n represents the total monthly installments
Some may find it tedious to calculate EMI using mathematical formula. The borrower may also calculate the EMI amount in excel with the formula EMI = PMT (Rate,Nper,PV,Type)
Where
Rate is the interest rate,
Nper is the total no. of installments,
PV is the present Value of the loan,
Type is either one or zero depending upon the EMI payment madeat the beginning or end of the month.
Fixed Rate of Interest: Interest rates,which are flat and fixed throughout the tenure of the loan repayment and have no correlation with the reducing loan amount. Such interest rates express a fixed percentage of the total personal loan amount.
Reducing Rate of Interest: Interest rates,which reduces as the loan tenure reduces and expressed as a percentage of the outstanding personal loan amount.
In the event of fixed rate of interest in the personal loan, the EMI payments stand same and constant during the entire repayment tenure of the personal loan, whereas in the event of reducing rate of interest, the interest rates vary depending upon the outstanding loan. Therefore, the EMI payouts also vary with change in the rate of interest on the personal loan.
EMI calculations are imperative to understand before taking a personal loan, and one has to ensure that the EMI amount is appropriate to be paid periodically as per the borrower’s budget and income. The quick personal loan sanction may be lucrative in nature, but being an unsecured loan type, the interest rates are higher on such loans. EMI amount consists of principal amount and the interest amount which is required to be paid back to the lender.
Understand your EMI periodicity and the amount beforehand, to have a smooth loan repayment structure.
Meaning of EMI
An important aspect associated with the personal loan is the EMI. EMI denotes equated monthly installment, a periodic payment towards a loan repayment which a borrower makes on a regular basis.EMI amount constitutes the principal value and the interest amount for the loan repayment. Initial EMI payments consist of a majority of the value as interest component, and as the tenure shortens, the EMI payments constitute more of principal amount which a borrower has to repay.
The Loan Amortization schedule is the representation of the EMI payment details in a tabular format which acts as a fact sheet for the borrower to scrutinize the loan status. It guides the borrower about the outstanding loan amount, remaining tenure, interest rate and outstanding principal amount status.
- Personal Loan Amount: It is the total sum which the borrower has taken as a personal loan from the lender.
- Rate of Interest: It is the amount which is expressed as a percentage of the principal amount charged by the lender.
- Term of the Loan: It is defined as a time frame which is mutually agreed upon by the lender and the borrower for the repayment of the personal loan amount.
Calculation of Personal Loan EMI
There are various ways to calculate the personal loan EMI amount based on the key determinants discussed above. The mathematical formula to calculate the EMI is[P x R x (1+R) ^n] / [(1+R)^ n-1]
Where
P represents the principal loan amount
R represents the rate of interest
n represents the total monthly installments
Some may find it tedious to calculate EMI using mathematical formula. The borrower may also calculate the EMI amount in excel with the formula EMI = PMT (Rate,Nper,PV,Type)
Where
Rate is the interest rate,
Nper is the total no. of installments,
PV is the present Value of the loan,
Type is either one or zero depending upon the EMI payment madeat the beginning or end of the month.
Relationship between Type of Interest Rate and EMI Amount
Interest Rates are usually of two types:Fixed Rate of Interest: Interest rates,which are flat and fixed throughout the tenure of the loan repayment and have no correlation with the reducing loan amount. Such interest rates express a fixed percentage of the total personal loan amount.
Reducing Rate of Interest: Interest rates,which reduces as the loan tenure reduces and expressed as a percentage of the outstanding personal loan amount.
In the event of fixed rate of interest in the personal loan, the EMI payments stand same and constant during the entire repayment tenure of the personal loan, whereas in the event of reducing rate of interest, the interest rates vary depending upon the outstanding loan. Therefore, the EMI payouts also vary with change in the rate of interest on the personal loan.
Relationship between the EMI and Pre Payment of Loan
Another variable on which the EMI payments are dependent is the pre-closure or partial payments made towards the loan. The number of partial payments for the loan is deducted from the base principal amount leading to the reduction in the interest amount which has to be paid otherwise. Borrower making a partial payment is endowed with two choices which are- To either retain the tenure same or
- To keep the EMI amount same
EMI calculations are imperative to understand before taking a personal loan, and one has to ensure that the EMI amount is appropriate to be paid periodically as per the borrower’s budget and income. The quick personal loan sanction may be lucrative in nature, but being an unsecured loan type, the interest rates are higher on such loans. EMI amount consists of principal amount and the interest amount which is required to be paid back to the lender.
Understand your EMI periodicity and the amount beforehand, to have a smooth loan repayment structure.
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