How to check if your calculated EMI is correct or not?

December 28, 2020

A lot of people take loans to either buy a house, a car, higher education, or other personal reasons. With the ease of loan application and approval, they have become very common and an integral part of our life as they help achieve our life’s goal.

What is EMI?
The Equated Monthly Income or EMIs are a major part of this loan that one has to pay in a specified time period. The EMI consist of the Principal amount ant the interest. While at the start the major portion of EMI is the interest and with time the contribution towards principal amount repayment increases.

What are the factors affecting loan EMI?
If you want to get a personal loan, it is important to understand the factors that contribute to the EMI of the loan.

1.      Loan Amount: The amount that has been borrowed by individuals from the lender is the major contributor to the EMI of a loan.

2.      The Interest Rate: The second important factor is the interest rate being charged by the lender. The interest rate is either charged in the full amount for all EMIs or on the reduced or outstanding principal amount that is left to be paid.

3.      Loan Tenure: Loan Tenure plays a major role in your EMI. It is the agreed time period agreed upon by the borrower and lender for the full repayment of the amount along with interest.

How is EMI calculated?
If you are confused that your lender is not charging the correct EMI on your loan amount this article will help you. While there are various personal loan EMI calculators available online for EMI calculation, if you are not sure that your EMI calculate is correct, the below steps will be of great help to you.

1.      Flat rate method: 
When the interest is levied on the total amount, regardless of the percentage of the principal amount already paid is known as the flat rate method.

The EMI calculation for this method = (Principal Amount + Interest)/ Period in Months

2.      Reducing Balance Interest Method:
When the interest is always levied on the remaining our outstanding balance i.e. Amount Borrowed minus the loan amount after repaying a certain amount of principal every month. While the EMI for each month remains the same, the interest component in the EMI keeps on reducing every month.

The formula to calculate EMI using the reducing balance method is:

EMI = P x {[R x (1+R) ^N] /[(1+R) ^N-1]}
P= Principal Loan Amount
R= rate of interest
N= Tenure for loan repayment

The above formula indicates two key pointers of Reducing Balance Interest Method:

a)      The EMI payment is directly proportional to the the loan amount and interest rate: An increase in amount and interest rate, also causes the EMI on the loan to increase.

b)     The EMI is inversely proportional to the tenure of loan: The amount of paid interest increases with longer tenures, but the EMI payments decrease if the loan is repaid over a longer time period

3.      Excel sheet:
If the above calculations are too complicated for you, opt for the easy way of using the excel sheet, they can also help you in determining whether your EMI is calculated correctly.

You can use the PMT function in excel to calculate the EMI, all you need are 3 variables:

a)      Rate of Interest (rate)
b)     Number of periods (nper)
c)      Value of loan or the present value of the loan (PV)

The formula which one can use in excel for EMI calculation is:

=PMT (rate, nper, PV)

These are the various methods that lenders use to calculate your EMI. If you too want to make the calculations, you can use the Loan EMI calculator available online to know all the information about your EMI.

Loan Amortization Schedule
A tabular representation of your loan along with the EMI payment is the Loan Amortization Schedule. It clearly indicates the breakup between the interest component and the principal amount for each EMI payment that you have to do. This data helps the investor in understanding how the loan is being paid and what is the outstanding loan? It has all the necessary information like interest, tenure, EMI, principal payment, and the outstanding loan.

If ever you want to foreclose the loan or refinance it, this Lon The amortization Schedule will come in very handy to understand the loan status.

Conclusion
With all the necessary information about EMI, this article will help you make better decisions about your loan. Before you opt for a loan, make sure to understand their Emi calculation method. Through this, you can make a better decision about the loan you want to take, and the tenure you must have to ensure minimum financial loan on you. While EMI is an important factor do not forget to check all the other necessary information like services being offered, interest rate, loan disbursal time, and other factors about your lender before you opt for a loan. 

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