Overview: What Is an EMI?
You see a product that you like. It has the newest features, the perfect design, and a price tag that you cannot afford right away. So, you have to save up for months for it. However, by then, a better version of the product launches with a price tag that you’d have to save up for, for a few more months.
This can be extremely disappointing. We’ve faced similar issues too. Don’t be disheartened because we have a solution!
Equated monthly instalment, more popularly known as EMI, can help counter this issue. EMI is a type of loan financial institutions provide to help a borrower purchase products.
Despite its benefits, many people refrain from such options due to various kinds of stigma. Let us try to bust some myths regarding EMI.
When taking an EMI, you have agreed to pay a certain amount of money every month (as instalment) to the creditor. This will continue until the loan has been paid off. The period provided to pay off the loan can vary with each EMI.
However, the borrower is informed of the exact amount of monthly instalment making it easy for him or her to plan future financial plans accordingly.
EMIs are generally given with interest as compensation to the institution. Each instalment goes towards a part of the principal of the loan (the amount borrowed) and the interest. This is why time is of the essence here.
The interest is calculated against the remaining principal left. Hence, the interest gradually decreases with each instalment. This reduces the payable amount for each instalment. Ensuring the required monthly deposits on time can save you from further financial stress.
For a better understanding, let us share the formula used to calculate EMI:
E = P r (1 + r)n{(1 + r)n - 1} where,
E = Equated monthly instalment
P = Principal loan amount
r = Rate of interest per month (if the rate of interest is given per annum, convert to per month and then apply this formula)
n = Period of the loan [unit of time in months, convert any other time unit to month(s) and then apply this formula]
There may be instances where you have a sum you can afford that is higher than your monthly instalment. Depending on your creditor, you may request to pay extra to reduce the outstanding principal. This is a wise choice as it reduces interest charges for the coming instalments and tenure.
However, if you fail to provide the payable sum for a month, the reverse occurs. You will have to pay off a larger sum for the next instalment, oftentimes with a ‘late fee’. This is why you must be responsible and pay off each instalment diligently. By doing so, you can save yourself from getting trapped in large debts.
How to Use an EMI Calculator
Technology has truly done wonders for the world. It has greatly contributed to helping humans achieve thrilling macroscopic tasks as well as extremely mundane everyday tasks. We will talk about its contribution to the mundane task of calculating EMI in this section.
Technology has turned taxing and long calculations into a task that can be done with extreme precision with a simple click. Calculating EMI is one such calculation. Before we learn how to use an EMI calculator, here are some facts you need to remember:
Principal Loan Amount in Rupees (the amount to be borrowed)
Loan Term (select unit of time and enter accordingly)
Rate of Interest [per (the same unit used for time)]
EMI Scheme (if applicable)
Type the values directly into the designated area of the EMI calculator to get started. This will automatically calculate the payable amount each month.
The pie chart will display the components of the total payment. That is, the pie chart will show the amount to pay off the principal and total interest paid by the end of the loan. The schedule tells you the amount payable each month or year.
It shows each instalment amount till the loan is scheduled to be paid off. However, keep in mind the fact that the calculator does not take the untimely repayments that may occur during the tenure into account. This will have to be calculated manually.
This calculator is extremely handy. It allows you to accurately plan all your financial agendas. This can help foresee certain financial issues as well, which may prevent you from paying an instalment.
Missing an instalment can be detrimental to your financial health. Foreseeing such issues can allow you to prevent such unfortunate circumstances.
Advantages of Using EMI Calculator
Being fully informed of your decisions before diving into them is extremely beneficial in any case. It allows you to stay on top of your financial obligations. Hence, it is important to use an EMI calculator. Here are some advantages of using an EMI calculator:
Accommodates the EMI in Monthly Budget
Calculating your monthly instalment allows you to prepare for the months ahead. You will be aware of the money you need to set aside to meet the instalments. Using this information, you can create a budget accordingly. This will allow you to spend without worrying about the next instalment.
Making Informed Decisions
For the best life, you must make the best financial decisions possible. To make the best decisions possible, you must be aware of every choice available to you.
The EMI calculator for a loan allows you to calculate outcomes in a jiffy. Hence, one should calculate the possible results by changing the different variables.
We suggest you take out a notebook or a spreadsheet. Change each variable and note down the results of each of them. Once you have completed noting down each case, compare them to one another. We do not mean that you go for the cheapest option available.
Often, you will find that it is not the most suitable option for you.
In each case, compare the variables taken as well. Is the borrowed principal amount adequate to meet your needs? Is the interest rate available? Are you okay with paying off this loan in 5 years? Can you afford the monthly instalments?
These are the important questions you must ask yourself when choosing a loan. However, do not limit yourself to these questions. There may be some personal issues you face. Taking all into consideration with an EMI calculator, you can find the outcome that best suits your interests.
Maintaining Healthy Credit Rating
Maintaining a healthy credit score is extremely important. This score is a huge deciding factor for a creditor’s choice in granting loans. If you suffer from a low CIBIL score (credit score), you may be denied loans.
Timely repayments of loans boost your credit score. Hence, being aware of the amount needed each month will help you keep up with payments and maintain a healthy credit rating.
Saves Time and Ensures Accuracy
It is possible to achieve all of these by manually calculating EMI. However, humans are prone to errors. Not to mention the complexity of the calculations makes us extra vulnerable to errors. This is not the case for automated EMI calculators.
They will always provide accurate results. A bonus: it can complete this calculation in seconds. Humans will generally take much longer to achieve the same task.
Accessible
These EMI calculators are extremely accessible. You simply need a device that can connect you to the internet. You do not need to download any fancy and space-consuming software. You can find it online and simply enter the values needed. This will provide you with all the information needed.
The above-mentioned points are only the generalised key benefits of utilising this tool. We are certain that you will find more advantages. After all, who doesn’t like it when a job is cut in half?
Effect of Loan Prepayment on Your Instalment Payments
Sometimes, people have a larger sum than expected saved in their bank accounts that month. Perhaps you hadn’t gone out much, you did not need to travel to work every day or you got a well-earned bonus.
You decide that you will process a loan prepayment on your EMI. In other words, you’d like to pay an additional amount on top of the monthly payments to reduce your outstanding principal.
This will be financially favourable. By reducing your outstanding principal balance, the interest calculated against it for the next few months will be reduced too. However, before choosing to apply for a certain loan, see the terms and conditions for prepayment.
Although most financial institutions such as banks allow prepayment, there are some exceptions.
Another factor to keep in mind is that even if your loaner does accept prepayment, they may require an additional charge. Generally, this amount is 2-4% of the remaining principal balance. Since this can be a large sum of money, one must be smart about the prepayment decision.
While paying a prepayment whenever possible reduces overall costs, it may not reduce it to the maximum though. For example, each month, if you apply for a prepayment, you would be paying the additional 2-4% charge with it as well. This may result in saving less money.
Instead, calculate the outcome of each scenario. Calculate the total amount being paid as prepayment and deduct the appropriate amount from the remaining principal.
This will allow you to enter values into the EMI calculator and you will get the result of future costs. Again, enter these values in a spreadsheet and compare.
Comparing may allow you to discover that saving up the amount for two months and then paying the total as prepayment may be more cost-efficient. Do not forget to consider the normal processing fees, if chargeable.
Missing out on small calculations can drastically change results. This will lead to a miscalculation which can catch you off-guard.
A popular notion in the financial industry is that RBI (the Reserve Bank of India) does not charge any foreclosure fees. This is correct only to some extent. This non-chargeable prepayment fee is only applicable on loans with floating interest rates.
Overall, if possible, we strongly suggest prepaying as early as possible (keeping in mind all other factors). Not only does this alleviate any stress you may be having for your loan, but it will also boost your CIBIL score.
Factors that Can Impact Your Due Amount
You now probably know that there are factors that impact your payable amount. When you are calculating the available choices, you make changes in these variables. You enter these change variables to find an EMI that suits your needs the best.
However, many experienced people miss out on some crucial variables that make a difference. To ensure that you do not miss out, here are the factors that can impact your due amount:
Rate of Interest (ROI): Generally, this is in the hands of the creditor you are accepting the EMI loan from. If you are acquiring a loan through a bank, they generally have a prefixed rate of interest.
These can only differ with each scheme. Hence, one should carefully choose a scheme when applying for an EMI loan.
The rate of interest is the extra amount given to your creditor as compensation for borrowing the money. The ROI is constant, the interest amount each month may vary. Since the interest is calculated with respect to the amount of the principal yet to be paid, it decreases with each instalment.
One must remember that the ROI and total payable amount, in the end, are directly proportional. Meaning, the greater the rate of interest, the greater is the sum that needs to be paid off in the end.
Principal Amount Borrowed: This is the amount you borrow from your creditor. The EMI is mainly dependent on this amount. This is because the interest paid is also dependent on this variable.
The tenure also depends on the principal amount to some extent. This is because the smaller the borrowed amount, the less will be the time granted by the loaner to pay off the loan.
While taking an EMI is a good option, it is only a good option when needed. Meaning, only if the money or support is needed, take an EMI. Do not take EMIs without any valid reason. While this may increase your CIBIL score, it will result in you spending much more than necessary in the long run.
As the rate of interest, the principal amount borrowed is directly proportional to the total payable amount. Hence, keep the EMI to a minimum to reduce the total debt to be paid off.
Tenure (time taken to pay off the loan): Time taken to pay off the loan is a big factor for the monthly instalments. However, it does not directly affect the amount of interest payable with each instalment. It does directly affect the amount of principal that is covered by each deposit.
To explain it further, the monthly instalment of a principal amount distributed equally in 12 months will be higher than the monthly instalment of the same principal amount distributed in 24 months.
Since it can dramatically affect the outstanding principal, the interest amount calculated also gets affected accordingly.
This can completely alter the numbers and can potentially drive you to debt if not carefully accounted for. Hence, be mindful of the decisions you are making. Always plan to prevent mishaps as much as humanly possible.
While tenure is directly proportional to the total payable amount, it is inversely proportional to the monthly instalments. This drives many short-sighted people to opt for longer-tenured loans.
Unfortunately, they soon understand the consequences of loans with longer time frames, but it might be too late by then. This forces them to prepay their way through the loan to minimise losses.
Frequently Asked Questions
Q1. Are the calculators for home, car and personal loans the same?
Answer: Usually, no matter what the reason for taking a loan is, the basic principles are the same. Principal borrowed amount, tenure of the loan, and rate of interest play the same role in loans.
Not to forget the prepayments and additional processing fees. Since the general idea and working formula are the same, you may use the same calculator for home, car or personal loans.
However, keep in mind the fact that schemes for each could be different. Hence, pay attention to the scheme you are opting for and study the ins and outs of it. This will help you understand if general EMI calculators are adequate to calculate the EMI for your specific scheme.
Q2. How can you calculate loan EMIs?
Answer: You can calculate your EMI loans by having the principal borrowed amount, the tenure of the loan, and the rate of interest your loan is being offered at. These three can be used to calculate your EMI. Put these variables in the formula below:
E = P r (1 + r)n((1 + r)n - 1)where,
E = Equated monthly instalment
P = Principal loan amount
r = Rate of interest per month (if the rate of interest is given per annum, convert to per month and then apply this formula)
n = Period of the loan [unit of time in months, convert any other time unit to month(s) and then apply this formula]
However, to save time and have more accurate results, you can simply enter the values into the EMI calculator. It will show you all the details you need in a matter of seconds.
Q3. What If I fail to pay my EMIs?
Answer: Many people are apprehensive about EMI loans due to the stigma around this. If one fails to pay EMIs, the creditor will generally add a penalty fee to your payable amount. If you pay this penalised fee and the monthly instalment in the next EMI, it will not lead to grave consequences.
However, if you keep missing your EMIs and it begins to cumulate, it may become a serious problem. Not only will it be difficult for you to pay off the payable amount, but your creditor can also involve you in legal processes.
Additionally, your credit score will be deducted. This will make it difficult for creditors to grant you loans in the future.
Q4. What does an EMI consist of?
Answer: Each EMI paid is generally broken into two parts. One part is to pay off the amount you had borrowed, that is, the principal amount. The second part is the interest.
The interest payable is dependent on the remaining principal. This is because the interest is calculated by taking the rate of interest against the principal left. Hence, the interest payable changes (decreases) after each instalment is processed.
This is why prepayment is strongly recommended to further reduce interest for the months left to fully pay off the loan.
Q5. Is the EMI amount shown by the calculator the same as that which the bank will ask me to pay?
Answer: Yes, the displayed Equated Monthly Instalment amount by the calculator is roughly the same amount the bank or your creditor will ask you to pay. That is, if the values you have entered into the calculator are the same as those for the granted loan.
The reason why we say “roughly” is, there may be processing fees or prepayments that have not been taken into account. The scheme which you have applied for may also require hidden charges. Read the terms and conditions thoroughly to learn about all the options available to you.
This will prevent you from having any financial troubles in the future.