It is in your benefit to know the whether you will be able to repay the loan comfortably while you apply for a housing loan. Learning about EMIs and how they are calculated can help you decide on the right loan amount and tenure.
Lenders assess the repayment capacity before granting housing loan to an applicant. Borrowers are expected to make the payments in Equated Monthly Installments (EMI)s and hence EMI is an important factor in determining your loan option.
Why is EMI Calculation Important
Since a portion of your monthly income will go towards EMI payments, it is advisable to understand that how it is calculated before taking a loan. Calculating EMI also helps you in the overall planning of your finances.
EMI calculation can prevent you from borrowing more than you are capable of repaying. This, in turn, can help you avoid any late payment or default on your loan.
The formula for EMI Calculation
The basic mathematical formula for calculating EMI is
EMI = [P x R x (1+R) ^N] / [ (1+R) ^ N -1]
P = Amount of loan taken
R = The interest
rate applied on the loan
N = Tenure of the loan in months
Let us see how this formula works with an example.
If you borrow Rs. 20,00,000 from a lender at a 9.5% interest rate for a tenure of 10 years, then the values of the variables in the formula will be as follows
P = 20,00,000
R = (9.5/12)/100 = .095/12
(9.5 is the interest per annum and hence must be divided by 12. Since it is a percentage, it is further divided by hundred.)
N = 120
(10 years is equal to 10×12 months)
Therefore, the formula becomes
EMI = [20,00,000 × 0.095/12 × (1 + 0.095/12) ^120] / [((1 + 0.095/12) ^120) – 1] = 25880
You can arrive at an EMI of Rs. 25880 through this formula.
EMI Calculation With Excel
If you know your way around Excel, you can use the spreadsheet to calculate your EMI easily. Use the function PMT and the three variables which are
Rate – the monthly rate of interest
NPER -number of periods or number of EMIs
PV – the value of the loan or present value
The formula to be used is
So, for the loan amount of 20 lakh tenure of 10 years and an interest rate of 9.5% p.a. as used with the mathematical formula previously, the Excel formula looks like
=PMT (.095/12, 10×12, 20,00,000)
This gives a result of 25880, which is the same as obtained using the mathematical formula.
Online EMI Calculators
Most reputed financial institutions have online EMI calculator tools on their websites to help the applicants. These tools are user-friendly and can help you calculate your EMI by inputting a loan amount and interest rate.
You can adjust the sliders to change the three values, namely, loan amount, tenure, and interest rate to calculate your EMI. Some calculators also give you a breakdown of the principal and interest components of the EMI.
Benefits of Online EMI Calculators
The online home loan calculators are a hassle-free way of estimating your EMI. The benefits of such tools include
- Effortless calculation
- Instant results
- Easy adjustment of the different values that influence the EMI
- Gives a better knowledge of the dependency of EMI on other factors
Learning the EMI amount you pay is crucial to making financial decisions in life. Using the tools and knowing the formula can give you a better understanding of the relationship between EMI and other loan factors such as tenure and interest rate. This can result in you making an optimal choice of lender and loan.