It is almost impossible to predict when we might need something in our life. Similarly, many times such situations come before us when we need a huge amount of money. Such as for marriage, studies, repair of the house or the treatment of any disease.
In such a situation, when you do not have enough money, then taking a loan is the best solution. To take a loan, you can either apply to any bank or any financial institution, by which you are given enough time to repay the loan.
In this, you have to pay the loan amount every month in instalment, i.e. in the form of EMI. If you want to take it home, then you can take a home loan. If you want to take a car, you can take a car loan, and you can take a personal loan for any other need.
For each type of loan, you get a different amount of time to pay the loan EMI. In this rising inflation era, repaying the loan through EMI can help you stay worry-free as you do not have to pay the loan amount all at once, and you already know how much EMI you have to pay every month.
What is EMI?
EMI, which is called Equated Monthly Installment, is a fixed amount you have to pay every month in the bank or the institution you have taken the loan. You are given a fixed tenure to repay the EMI. I understood in simple words that EMI is a kind of facility given by banks and financial institutions to their customers when facing any financial crisis.
To repay the loan in EMI, an interest rate is first determined, after which the EMI amount is fixed and time is given as per the requirement of the customer to repay the loan EMI. The customer has to pay the EMI on a fixed date every month, and if you want, you can pay the EMI through check or ECS facility.
What happens in EMI?
There are two things in any EMI, that is, the principal and interest. In the initial period, more of the EMI is of interest, whereas as time progresses, the amount of interest decreases along with the amount of principal. The amount starts increasing. The principal part of the EMI of any loan is the highest while the interesting part is less.
What is an Amortization Schedule?
Amortization Schedule is very important to understand the EMI of any loan. Amortization Schedule is a table by which you are given complete information about your loan, and in this, the complete breakup of your EMI is also explained. In this, the amount of principal and interest of each EMI is also mentioned. Through this, you are given information about your loan and all future EMIs.
In the Amortization Table, how much loan you have taken, how much interest you have to pay, when you have to pay EMI, all this information are written. This makes it easy for you to understand how your loan is working, and sometimes you need it to avail of tax benefits.
How is EMI calculated?
The mathematical formula is used to calculate the EMI of any loan. The formula to calculate EMI is
In this, P stands for the loan amount, R stands for the interest rate at which the EMI for the month is determined. N refers to the repayment period of the loan.
Let us show you by calculating EMI through an example, suppose Vinay has taken a loan of Rs 5 lakh, for which he has to repay the loan at the rate of 12% interest and the loan tenure is three years. If we use the formula given above, If we calculate the loan’s EMI, then the loan’s EMI will be 16,607 per month.
Factors Affecting EMI
Some factors affect the EMI of any loan.
Principal Loan Amount: The principal loan amount is the loan amount we take from any bank or financial institution. This is the biggest factor affecting any EMI, and due to this, the EMI is determined. If the loan amount is more, then the EMI amount will also automatically increase.
Interest rate: This is the rate at which the bank or financial institution gives the loan to anyone, and it also plays an important role in determining the EMI. The interest rate is determined based on the customer’s credit profile and other calculations.
Loan Tenure: Loan tenure means the period the creditor will repay the loan amount for a specified period. If the loan tenure is longer, then the creditor has to pay more interest for that loan to the bank or financial institution.
Type of interest rate
Fixed Interest Rate
When the interest rate in any loan remains fixed for the entire tenure, then the EMI of the loan remains the same for the entire period. Usually, the fixed interest rate is 1 to 2 per cent higher than the floating interest rate. However, being a fixed interest rate, the interest rate does not change during the entire loan tenure, and you already know how much EMI you have to pay in future.
Floating Interest Rate
In any loan with a floating interest rate, the interest rate keeps on increasing or decreasing according to the market. The floating interest rate depends on the base rate offered by the lending bank or financial institution. Therefore, whenever there is a change in the base rate, the interest rate automatically changes.
The fixed interest rate or floating interest rate
We have understood by now that due to the loan’s fixed interest rate, we can remain worry-free about our EMI. With the loan having a fixed interest rate, we are assured of the amount to be repaid. If you want to avoid the risk of the interest rate rising day by day, then a fixed interest rate is the best, and when the loan repayment period is between 3 to 10 years, then a fixed interest rate is considered the best.
But by many experts, if the loan tenure is 20 to 30 years, it is considered better to choose a floating interest rate to repay the loan. When you are aware that the base rate will remain the same throughout the loan tenure, you should opt for a floating interest rate for your loan. Through this, if you want, you can also plan to make prepayments, which will reduce the total interest amount on your loan, and this will also save you a lot.
Does the EMI change during the loan tenure?
As we have read so far, the EMI of any loan depends on various factors such as the loan amount, interest rate and tenure of the loan. However, sometimes the EMI amount can change during the loan tenure, and the main reason behind this is the following.
Prepayment of loan: Many banks and financial institutions allow you to repay part of the loan amount together prematurely, called prepayment. Through this facility, you can repay some of your remaining loan amounts to the bank in one lump sum instalment, after which the principal amount of the loan taken by you comes down. Then your EMI also gets reduced automatically.
Progressive EMI: Many financial institutions also give you the option of Progressive EMI to repay the loan. In this, the creditor has to pay a fixed EMI for a certain period, after which the principal amount of the loan increases slightly. Such items are mostly used for longer loan tenures.
Floating Interest Rate: If you have taken a loan at the fixed interest rate, then there will be no change in your EMI for the entire loan tenure, whereas if you choose the floating interest rate, then due to any change in the interest rate. There is also a change in EMI.
What is EMI Calculator?
Any EMI calculator is a tool by which monthly instalment, i.e. EMI, is calculated. In this, EMI is determined by your information, loan tenure, interest rate, and loan amount. With the help of the EMI calculator, the person taking the loan also gets the correct information about how much they have to pay as EMI. EMI calculator helps to calculate various types of EMI such as
- Home Loan EMI Calculator
- Education Loan Calculator
- Personal Loan Calculator
What are the benefits of the EMI calculator?
There are many benefits of the EMI calculator. Some of the main advantages are as follows.
Financial Planning: Nowadays, there are many EMI calculators available online. These EMI calculators are very beneficial for us. With the help of this, we get information about how we can invest for the future by understanding our expenses of every month very well.
Time-Saving: With the advent of online EMI calculators, the need for manual calculations has been eliminated. So this did not save your time. With the help of an online EMI calculator, you can easily and quickly find out how much you will have to pay for your loan.
Ease of Comparison: With the help of the online EMI calculator, you can also compare the different offers you are getting for the loan in one go. You can see the results in different ways by entering the loan amount and loan tenure as per your requirement, and this information can be of great use to you.
Accurate Figures: The calculation done by the online EMI calculator is done by computer, so you can rest assured that whatever result is given to you by the EMI calculator is correct. You get accurate information about the total amount you will be paying.
Ease of Use: You no longer need to visit the bank to know the total amount you will pay for the loan in the future. You can easily use the online EMI calculator from anywhere on your computer or mobile.
Frequently Asked Questions (FAQs)
Is EMI good or bad?
As we know that EMI provides an opportunity to repay our loan in easy instalments, we also have to understand that in paying through EMI, we have to pay more than the total amount taken. This higher amount is due to interest and processing fees. Apart from this, if you fail to pay your EMIs on time, you have to pay the penalty instead of that which is in the form of an additional charge, which also affects your credit score.
What is the difference between EMI and Loan?
A loan is an amount that a bank or financial institution gives. In return, there is an agreement between the borrower and the lender that the loan amount and the interest amount will be repaid within a stipulated time. EMI is a method to repay the loan in which the loan amount, which includes interest, is repaid as a fixed amount every month.
Is GST applicable on personal loan EMI?
GST is not levied on the loan interest or loan amount but top of the GST processing fee and other charges.
What if EMI is not paid on time?
Suppose the EMI is not paid on time. In that case, it has more impact on the credit score of the person, usually, if a customer forgets to pay one of his EMIs, then the bank does not put him on the list of defaulters, but after missing 3 EMIs, the bank Regularly reminds the customer that his EMI has been missed. After which, the bank levies late fees and other charges.
What is No Cost EMI?
No Cost EMI means that you do not have to pay any separate interest for the loan taken by you. Usually, No Cost EMI is offered by online stores and that too for small ticket sizes. Which includes Consumer Durables and Electronics etc.