Let’s get back to the early 2000s. You want to buy a car or a home, or want to go abroad for higher education, but you drop the idea.
Why? The biggest reason will probably be you don’t have enough funds for them. So, you don’t have any choice, but to delay your wish for 5-6 years, when you will have enough savings for your wishes to come true.
But now, you don’t have to wait for the next 5-6 years. If you are earning but do not have enough money, go to the bank.
Submit the required documents and boom, you will get a loan for your needs. And also, you don’t need to pay back the money in one go.
You have the luxury to pay the loan in monthly installments, also known as Equated Monthly Installment(EMI).
The bank will charge you interest according to your loan amount at a nominal rate of interest. This rate of interest varies according to the types of loan.
Education loans have different rates; car loans have different rates and home loans have different interest rates, varying from bank to bank.
Lets understand what EMI calculator and how it works. In this article, we will take you through the EMI of a car loan.
Equated Monthly Installment(EMI)
EMI stands for Equated Monthly Installment. It is the money you will be paying back to the bank at a regular interval (usually monthly), against the borrowed loan in the restricted frame of amount.
In Layman’s terms, let’s assume that you borrowed Rs 5000 from your friend and told her that you will pay it back in 10 months. Now either you can pay her the total 5000 at the end of 10 months, or you can pay 500 every month till the end of 10 months.
This Rs 500 you are paying her at the end of every month is the EMI you are paying. But the bank will not simply divide the borrowed amount by the tenure of loans and calculate your EMI.
Since the bank charges interest on your loan, you may have to pay slightly more than what you have borrowed. An EMI depends on three factors.
-> Principle Amount: This is the amount you borrowed from the bank.
-> Tenure of Loan: This is the time limit bank and you agree to the loan repayment.
-> Interest Rate: This is the rate at which the bank agrees to give you a loan.
An interest rate is of two types: Simple Interest and Compound Interest. The bank gives you the loan at the compound interest.
Other than the factors mentioned above, there is one more factor on which your EMI depends. This factor is dependent on the borrower.
Whether the borrower wants to pay a fixed amount or a random amount, EMI will vary accordingly. In case you want to pay a random amount, your EMI will vary according to market rates. If the rates increase, your EMI will also increase and vice-versa.
The other factor which affects the EMI payments is the partial payments made towards the loan. Any partial payments made towards the loan are deducted from the principal amount of the loan.
This results in the reduction of the total interest that is to be paid. In this case, you will be given an option to keep the tenure constant or keep the EMI constant.
If you opt for constant tenure, the monthly EMI payments will be reduced. If you opt for constant EMI, the tenure of loan will be reduced accordingly.
Calculation of EMI
As mentioned above, there are three different factors for EMI calculation. Let’s assume that you are going to buy a car.
You know your requirement, but it will be a hassle to calculate the EMI on your own so that you can plan things accordingly. In for rescue comes the loan EMI calculator.
Car loans are a type of loan that is used for buying an automobile. Some financial institutions have introduced loan schemes specifically made for buying an automobile.
Some banks provide 100% of the amount you require to buy a car.
ICICI, India’s third-largest private-sector bank is such a financial institution. ICICI calculates its loan EMI from the formula:
E=[P×R×(1+R)^n] ÷ [[(1+R)^n]-1]. It is the bank’s calculator and they provide it to an individual.
This helps them to calculate their monthly repayment liability before they go for a loan. This will help their future financial plans.
Take an example: Suppose you want to buy a car worth Rs 6 Lakhs. You go to ICICI bank and ask them for the loan. They tell you about TnC and also the rate of interest, which is 12%.
You are then asked to choose different tenure plans. Suppose you go for an 8-year tenure. Putting all the values in the above-given calculator, you will get a monthly EMI of Rs 9752 and you will be paying an interest of Rs 3.36 Lakhs.
How to use the EMI calculator
ICICI has created the calculator in such a way that it will be easy to use for everybody. It is very user-friendly and does not need a very high knowledge of financial jargon.
The calculator also provides you with a pie chart to help you understand the bifurcations easily. You can also alter your loan amount, rate, or tenure to check for better options.
In the calculator, you need to enter:
(i) The principal amount of the loan
(ii) Tenure of the loan (months or years)
(iii) Applicable rate of interest
In the calculator, you can either use the slider to adjust the values or directly enter them in the textbox given in the calculator. As the values change, it automatically changes the EMI, there is no need to refresh the page every time.
There's also a pie chart showing the breakdown of total payment (total principal vs genuine interest payable). In all charges made against the loan, the EMI interest calculator shows the genuine interest versus the principal percentage.
Benefits of EMI Calculator
Accessibility: Since the EMI calculator is easy to use, every common person with no knowledge of financial terms can access it. Being a digital calculator, you can use it from anywhere and any number of times. There is no restriction on it.
Time-efficient: Sometimes, calculating the EMI manually, for comparison between banks, can become a huge and tedious task. But since the ICICI EMI calculator is online and you have everything on the plate, it cuts a lot of time consumption. It reduces all the lengthy, difficult calculations and makes them simple. Just enter the values and in a matter of seconds, you will have your EMI.
Accuracy: When doing a lengthy manual calculation, there is a chance of making a mistake. Even a small mistake can change the answer drastically. Therefore, the computer-based EMI calculator can also increase the accuracy of tedious calculations. With a single click and you will get your error-free calculations.
Financial Planning: This is the biggest perk of online EMI calculators. Getting to know how much you will spend on EMI every month can help you plan your expenses in a much better way. You can predict which expenses you can cut in a given month. This will allow you to apply for the loan within your monthly budget. Also, it will help you decide which EMI plan is affordable for you.
Effect of Loan Prepayment on the installment payments
If the prepayment of the loan is done in full at an early stage of the loan tenure, you can save a lot of money on the interest. A loan generally has a one-year period, in which you can not pay the whole amount.
After that, the whole remaining payment can be done in one go. But you need to be careful as well. Some banks also have penalty charges(3%-5%). If your repayment EMI is on a floating rate, you can escape the penalty, but not in the case of fixed EMI
Factors impacting the due amount
There are few factors that affect the due amount:-
How well are you paying your loans?
Whether you are giving fixed EMI or a floating EMI?
Do you timely pay your EMI?
Whether you are trying to prepay your loan.
These are some of the factors that affect the due amount.
Frequently Asked Questions
Q1. Are the calculators for home, car, and personal loans the same?
Since the formula for every kind of loan is the same, yes the calculators will be the same. Some banks take different factors, so loan amounts can have different rates, but the EMI calculator will remain the same.
Q2. How to calculate loan EMIs?
Every bank uses same formula for EMIs,E=[P×R×(1+R)^n] ÷ [[(1+R)^n]-1]. But it is best advised to use an EMI calculator, for easy calculation and great accuracy.
Q3. What if I fail to pay my EMIs?
If you are unable to pay EMIs for 3 consecutive months, lenders may call it a default and take appropriate action. You will receive a legal notice of default with a grace period in which you are needed to repay your outstanding loan amount.
In case of failure, bank may confiscate your pledged assets including a car or home.
Q4. What does an EMI consist of?
An EMI consists of your loan amount(P), your rate of interest(R) and your loan tenure(n). These three factors determine your EMI.
Q5. Is the Equated Monthly Installment amount shown by the calculator the same as that which the bank will ask me to pay?
Yes, there will be no difference in the EMI shown by the calculator and the actual amount the bank is going to ask you to pay; given that you are going for a fixed EMI.
In case of floating EMI, since the rate of interest varies with the market rates, you will need to change your EMI accordingly.