Getting a loan, whether for a house, a car, or any other reason, is probably one of the major financial decisions that most individuals make. It is very crucial for anyone considering taking out a loan to know just how much they are expected to repay every month. This is when an EMI calculator comes in handy.
What is an EMI?
EMI means equated monthly installment. EMI is the constant amount paid by a person to his/her creditor for repaying the loan he/she took from his/her creditor. There are two components of an EMI, which are as follows:
Amount of principal – the portion of EMI that is used in reducing the principal amount of the loan taken
Amount of interest – the cost that you incur for borrowing the money from the bank.
At the beginning of the period when the loan was taken, a major component of the EMI is used for paying interest. As time passes, the proportion used in paying off the interest becomes smaller.
Formula to Calculate EMI
Here’s the basic formula used to compute EMI:
EMI = [P × R × (1+R)^N] / [(1+R)^N – 1]
Where:
P = The total amount of money borrowed
R = Monthly interest rate (Annual rate ÷ 12 ÷ 100)
N = Total number of months taken to repay the loan
An Example Calculation
Now let us assume that you have taken a loan of ₹30,00,000 from the bank on which the annual rate of interest is 8.5%. The tenure of this loan is 20 years (240 months).
P = 30,00,000
R = 8.5 / 12 / 100 = 0.007083
N = 240
Using the above values, you will get your monthly EMI equal to approximately ₹26,035. During the entire period of 20 years, you will have to pay ₹62.5 lakh which means interest paid on this loan will be approximately ₹32.5 lakh.
Such tedious calculations done manually are very tiresome and prone to errors; this is precisely what an EMI calculator does for you.
Risks Involved in Manually Calculating Your EMI
Any slight mistake in the assumption about the interest rate or tenure of your loan may result in a huge discrepancy in your EMI calculation. In case of a big loan such as home loans, a small variance in the interest rate (by say, 0.5%) can have a drastic impact on your EMI and total interest amount. The use of the special tool helps you eliminate this risk and ensures instant and accurate calculation.
Using the DK Calculator EMI Calculation Tool
Provide the amount of loan that you would like to borrow.
Put in the interest rate provided by your lender (refer to the loan offer letter).
Enter the tenure of the loan in number of years or months.
Click on the calculate button to know your EMI amount, the total interest amount, and the total repayment amount.
Due to the quick and instant calculations, you can easily modify the tenure or the loan amount and check its effect on your monthly EMI amount.
EMI Selection Tips
Do not exceed an EMI more than 40% of your monthly income. The advice from financial consultants is that the total amount of EMI (in case you have more than one loan) should never be more than 40% of your monthly take-home pay.
Look into tenure and total interest paid. A higher tenure means a lower EMI but higher total interest and vice versa.
Consider your ability to pre-pay. In case your loan gives you the facility of partial pre-payment without any penalty, you will find it very helpful in reducing your total interest.
Calculate your total interest before refinancing your old loan. If there is a reduction in interest rate, try calculating whether or not it will be economical to refinance.
EMI of Loan and Return on Investment
The DK Calculator users also utilize other tools of financial calculators that enable one to compare the EMI on loans with returns generated from investment or through FDs. In case you are using the loan to make an investment, then you should ensure that the return from the investment is higher than the EMI you have to pay because of the borrowed amount.
Conclusion:
Knowing the exact EMI makes you take control of your money management instead of being forced into accepting the EMI quoted by the bank. It just takes a few moments for the DK Calculator EMI tool to perform all calculations.