Financial matters, especially loans, can seem confusing with all the terminology thrown around. There are principal amounts, interest rates, loan lengths, and EMIs (Equated Monthly Installments) to make sense of.
It's a lot to wrap your head around.
However, using the right tools can make it easier. For example, an EMI calculator is helpful when you're applying for a loan. You just input the loan amount, interest rate, and how long you'll take to pay it back – and the calculator tells you the EMI amount you must repay each month.
The EMI calculator does the complicated math for you so you can understand what your monthly financial obligation will be, thus helping you plan your loan journey.
What is EMI?
EMI, which stands for Equated Monthly Installment, is the set amount you pay each month to repay a loan. The EMI depends on three main factors: the total loan amount, the interest rate, and the length of the loan (how many months or years you have to pay it back).
How is the EMI calculated?
For the mathematically inclined, here’s how a personal loan EMI calculator works.
The calculations are based on the formula: EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
where P= Loan amount, R= interest rate, N=tenure in number of months.
Seems way too complicated to be calculated with a pen and paper, right? But why bother when an EMI calculator will do it for you accurately and in a snap!
Basically, an EMI calculator does all the math for you and determines what your fixed monthly payment will be over the tenure of the loan.
How to Use an EMI Calculator
Most banks and financial websites provide free EMI calculators. Alternatively, you can use Excel or other finance apps to calculate your EMI.
Here are the key steps
Step 1- Determine the Loan Amount Needed
First, figure out how much loan you need. For a home loan, factor in the property price and the down payment you can make. For a car, decide the on-road price and down payment amount. For personal loans, determine how much money you need to borrow to meet a specific expense.
Step 2- Find Out the Interest Rate Offered
Do some research to find out prevailing interest rates. Banks and lenders have different interest rates depending on your credit score and income eligibility. Shortlist lenders that can offer you the most competitive interest rate.
Step 3- Decide the Ideal Loan Tenure
Loans are available for different tenures ranging from 1 year to 30 years. A longer tenure means lower EMI but higher interest payout. Decide your loan period depending on your repayment capability and total interest outgo.
Step 4- Enter the Details in the EMI Calculator
When using the EMI calculator, enter the loan amount, interest rate and loan tenure to automatically calculate your EMI.
Also note that an EMI comprises two components - the principal amount and the interest amount. The principal goes towards repaying the actual loan amount you have borrowed. The interest is the extra fee charged by the lender for providing you with the loan.
Step 5- Check Affordability and Adjust Variables
Examine if you can afford the EMI estimated. If not, adjust the variables like loan amount, tenure, or interest rate to recalculate the EMI as per your income.
Step 6- Compare EMIs from Different Lenders
Use the EMI calculator to evaluate loan options from different banks and lending institutions. Opt for the lender that offers the lowest EMI and total interest outgo.
Conclusion
An EMI calculator enables you to make well-informed loan decisions. It allows you to check your equated monthly instalments, total interest amount, total repayment amount, and scheduled repayments, helping you choose a comfortable tenure and EMI for your loan. You can also use an EMI calculator to compare loan offers from various banks. Therefore, being well-versed in using an EMI calculator is critical for making informed decisions on loans and better money management. It can provide you with greater control over your finances.
