In the last two decades India has witnessed a revolution in the arena of banking sector particularly in the loan segment. To build a strong customer base, banks as well as other financial institutions simplified the course of loan processing which, in turn, benefited customers to fulfill their dreams.
Nowadays, most of us have taken some kind of loans from the bank, be it education loan, home loan, car loan or some sort of personal loan. While taking a loan, the most important factor that grasps our attention is the EMI part. Here we are doing to throw some light on the details of EMI, calculation of EMI and factors affecting the EMI.
What is EMI?
EMI stands for Equated Monthly Instalment which is usually a fixed amount of money that the borrower needs to pay the bank or the lender on a monthly basis. EMI payment includes contributions towards principal as well as the interest charged on the loan amount. During initial years, a large part of the EMI goes towards the repayment of interest and then it starts to contribute more towards principal amount of loan.
Usually banks offer two types of loan repayment EMI. These are Fixed Rate EMI and Floating Rate EMI.
• Fixed Rate EMI: Fixed interest rate loans are those where interest rate remains same throughout the tenure of the loan. It is better to opt for fixed rate EMI if interest rate is lower than the usual rate of interest.
• Floating Rate EMI: Loan interest rate largely depends on the volatility of the market and RBI decisions that controls future course of the market. Floating rate EMI can change in accordance with the market trends leading to sudden rise and fall in interest rate.
How EMI Is Calculated?
EMI consists of two variable components. These components are the principal amount and the interest rate charged on the loan amount. Interest amount part of the EMI is higher in initial years and it decreases over the years. EMI is calculated involving many factors like loan amount, interest rate and tenure of loan repayment. Formula to calculate EMI is mentioned below.
EMI = [P x I x (1 + I)^N]/[(1 + I)^N – 1]
Where, P = Principal loan amount
I = Interest Rate per month
N = the number of installments
What Is Online EMI Calculator?
There are many EMI Calculators available online which makes your task easy while calculating the EMI. You just need to provide some loan information to know the exact amount of EMI. Online EMI Calculator is the most simple but accurate way to determine your loan EMI. In fact, you can check your monthly EMI for a certain amount of loan before you actually opt for the loan. Online EMI Calculator helps customer design customized financial strategy and set financial goals.
What Are The Factors That Affect EMI?
EMI calculation involves factors like loan amount, loan repayment tenure and monthly interest rate. Basically these all three factors determine the loan EMI and change in any one of these factors can manipulate the EMI amount. If loan amount and interest rate are higher, you can expect a bigger amount of EMI to pay every month. Loan with shorter repayment schedule increase the EMI whereas longer loan repayment schedule reduces EMI amount, provided interest rate remains the same. Another factor that affects EMI is the age of the borrower. Some bank applies higher interest rate after crossing the specified age limit.
Conclusion:
From the above discussion, it is evident that loan amount, interest rate and loan repayment tenure are the three governing factors for EMI calculation. Loan EMI is directly proportional to loan amount and interest rate and it is inversely proportional to the loan repayment tenure. Consider these factors and opt for fixed or floating rate of interest after analysing your present and future financial goals. It is recommended to check the EMI amount on an online EMI Calculator to get a fair idea on how much to pay.
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