An EMI (Equated Monthly Installment) is a fixed monthly payment made by a borrower to a lender to repay a loan, such as a home loan, car loan, or personal loan. It includes both the principal amount and the interest charged over the loan tenure.
- Loan Amount (Principal): The total amount borrowed.
- Interest Rate: The annual interest rate charged by the lender (convert to monthly rate for calculations).
- Loan Tenure: The duration of the loan, typically in months or years (convert to months for calculations).
Method 1: EMI Calculation Formula
The mathematical formula to calculate EMI is:
EMI = [P × r × (1 + r)^n] / [(1 + r)^n - 1]Method 2: Using Microsoft Excel
Excel simplifies EMI calculations using the PMT function.
Formula:
PMT(rate, nper, pv)
Method 3: Using Online EMI Calculators
Most banks and financial websites offer free EMI calculators. Simply input:
- Loan amount
- Interest rate
- Loan tenure
The calculator instantly provides the EMI, total interest payable, and an amortization schedule.
Key Points to Understand EMI
- Components of EMI:
- Principal: Part of the EMI that reduces the outstanding loan.
- Interest: Part of the EMI that goes toward interest charges.
- Early in the loan tenure, the interest component is higher; later, the principal component increases.
- Amortization Schedule:
- A table showing each EMI’s principal and interest components, and the remaining loan balance.
- Many online calculators provide this schedule.
- Factors Affecting EMI:
- Higher Loan Amount: Increases EMI.
- Higher Interest Rate: Increases EMI.
- Longer Tenure: Reduces EMI but increases total interest paid.
- Shorter Tenure: Increases EMI but reduces total interest paid.
- Prepayment and Foreclosure:
- Making partial prepayments or foreclosing the loan can reduce the tenure or EMI.
- Check with the lender for prepayment charges, if any.
