What is an EMI?

Be it a secured or unsecured loan, borrowing funds from banks and NBFC help in clearing a financial crisis. You can avail a secured loan to buy a house or upgrade to a new car. With the help of unsecured loans, you can fulfill your dreams to travel to a new place, pay for emergency medical care, plan a wedding, or pay for education.

However, all loans need to be repaid to the lender. Loans are usually repaid in parts called EMIs.

But what is an EMI and what does EMI stand for? An EMI or equated monthly installment is the monthly payment that the borrower makes to the lender. The EMI is paid on a particular date as decided by both parties.

The EMI amount has two aspects: the principal amount and the interest rate of the personal loan.

During the initial months when a borrower starts to pay the EMI amount, it is the interest that forms a major portion of the payment. As the borrower keeps paying the EMI amount, the interest reduces and the principal amount takes over as the major part of the repayment.

Factors That Affect Your EMI Amount

Before availing a personal loan, it is important to calculate the EMI. The basic purpose of doing so is to be aware of how much money you will be repaying every month to the lender. This helps in financial planning as a portion of the borrower’s salary will be dedicated to paying the EMI. Borrowers can use a personal loan EMI calculator to know their monthly repayment amount. 

Before calculating the EMI amount, there are a few important factors that borrowers need to keep in mind:

  • Loan Amount: This is the principal loan amount that is availed by the borrower. During loan repayment, the principal loan amount is split into smaller portions throughout the tenure of the loan. What borrowers need to remember is this – higher the loan amount, higher the EMI amount. 

  • Credit Score: A credit score or a CIBIL score plays a very important part when it comes to EMIs. If a borrower has a high credit score, there is a possibility that he will be able to avail a personal loan with a lower interest rate.

    This means the EMI amount may be low as well. However, borrowers with bad or negligible credit scores may have to pay higher interest on their personal loans and, in turn, pay higher EMIs.
      
  • Interest Rate: The interest rate is the charge that the lender levies on the principal amount borrowed. Borrowers can choose between fixed and floating interest rates. If they choose a fixed interest rate, this would mean that the EMI will be paid at the same interest rate throughout the loan tenure.

    Floating interest rates, however, are regulated by the Reserve Bank of India and will vary throughout the loan tenure. This means that borrowers will not pay a fixed amount as EMI. Borrowers may pay higher or lower EMI amounts depending on the base rate at the time of payment.
     
  • Loan Tenure: tenure of the loan is the duration through which the loan is to be repaid. Choosing a short loan tenure would mean that borrowers may pay high EMI amounts for a short period and vice versa.

How to calculate EMI?

Once the loan amount and the loan term have been decided by the borrower, calculating the EMI is simple using a personal loan EMI calculator. Based on the three factors, borrowers can calculate the EMI using the mathematical formula given below

P x R x (1+R)^N / [(1+R)^N-1]

Here, P is the principal loan amount, R is the Rate of interest and N is the tenure or the number of monthly installments of the loan.

Assuming that the borrower has availed a personal loan of Rs 2 lakh with a 10% rate of interest while the loan tenure is for 12 months.

Rate of interest is calculated monthly as Rate of interest/number of months/100= 10/12/100= 0.0083

Hence, the EMI amount for a loan of Rs 2 lakh would be:

2,00,000 x 0.0083 x (1+0.0083)^12 / [1+0.0083]^12-1] = Rs 17584.00

A cash crunch can occur unexpectedly at any given time. Instead of running from pillar to post to gather funds, an unsecured personal loan can give you the reprieve you need. You can avail a travel loan, wedding loan, education loan and medical loan from Finnable.

Calculating the loans’ EMI amount before availing the loan helps borrowers budget their funds accordingly. They can use Finnable’s online loan EMI calculator to find their EMI amount instead of manually calculating. We at Finnable provide quick and easy personal loans, with affordable interest rates and flexible tenure so borrowers can choose the EMI they are financially comfortable with.

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