Understanding how to calculate Equated Monthly Installments (EMIs) for your loans is important in loan management and financial planning. Whether it is personal loans, home loans or any other type of credit, calculating your monthly EMI can help you plan the repayment structure. This article explains what EMI is in brief, the steps involved in calculating monthly EMI amount, and explores the relation between exit load and loan repayments.

What is an EMI?

After exploring the EMI full form, let us understand what it is. An EMI is a fixed amount that is paid by the borrower every month to repay the total loan amount. Every EMI payment has two components:

• The principal amount is directed towards repaying the original loan amount.
• The interest component is directed towards repaying the interest levied on the loan amount.

Two Main Types of Interest Rate

There are two types of interest rates, floating interest rate and fixed interest rate. In a floating interest rate, the rate of interest changes throughout the tenure of the loan. On the other hand, in a fixed interest rate, the interest remains constant throughout the loan tenure. The EMI amount in floating interest rate may vary each month, while it remains consistent in fixed rate, allowing predictability and financial stability.

Understanding the Formula Used for EMI Calculation

Individuals can use the EMI formula to manually calculate their monthly EMI amount. However, to avoid the possible errors associated with manual calculations, borrowers can use online EMI calculators that use the below-mentioned formula.

Monthly EMI amount = [P*R*(1+R)^N]/(1+R)^N -1] where,

P = The original loan amount,

R = The monthly rate of interest (annual rate/12),

N = The tenure of the loan or the total number of instalments

Calculating Your Monthly EMI Amount

Knowing your monthly EMI amount can help plan your monthly expenses, compare various loan lenders, and understand the true cost of the loan since the interest payments are included in the original amount. Individuals can compute their monthly EMI amount by following the steps mentioned below.

Step 1: Gather various values such as the total amount of capital you need to meet your financial needs, interest rate, and tenure of the loan.

Step 2: Divide the interest rate by 12 to acquire the monthly rate.

Step 3: Input these values in the formula given above. Instead of performing these calculations manually, you can use online EMI calculators to save time and computation errors.

Factors Affecting Your Monthly EMI

The three main factors that affect your monthly loan repayment amount are:

• Principal Amount or Original Loan Amount: If your original loan amount is large, your substantial monthly repayment amount might also be large, which might lead to a financial crunch.
• Interest Rate: Individuals who have low credit scores or other factors may be subjected to higher interest rates, which increases the monthly EMI and the total cost of the loan.
• Loan Tenure: For home loans, the tenures can be longer while the tenure may be shorter for personal loans. Depending on the interest rates, longer-tenure loans might lead to lower EMIs and shorter-tenure loans may result in larger EMIs. However, the total cost of the loan may increase in long-tenure loans.

Relation Between Exit Load of Mutual Funds and Loans

While planning loan repayments, some borrowers may choose to simultaneously invest part of their monthly EMI in mutual funds to convert them into a loan prepayment. In such cases, understanding the exit load in mutual fund and its impact on the loan amount is important. Exit load is the penalty charged by the mutual fund house to individuals who redeem their units before a predetermined period. The amount of fee is some per cent of the total redeemed amount. If individuals redeem their invested amount for making a loan repayment, they may not receive the expected amount since the exit load reduces part of the redeemed amount. Therefore, borrowers must factor in the exit load amount before making premature withdrawals of the invested amount for loan repayment.

Conclusion

EMIs allow borrowers to repay a loan without straining their financials. However, calculating your monthly EMI amount using the EMI formula can help you plan your financials and monthly expenses. Entering various values such as original loan amount, monthly interest rate and loan duration in the EMI formula can assist you in calculating your monthly EMI. Borrowers who plan to repay their loan while investing in mutual funds must understand the effect of exit load to simplify their loan repayment structure.