You might require a loan for a multitude of reasons; such as education fees, travel expenses, shopping, medical emergencies, home renovation, and unforeseen emergencies. But before applying for a loan, let us first understand the basic component of it, i.e., EMI – Equated Monthly Installment.
What Is an EMI?
Equated Monthly Installment or simply EMI is a fixed amount you pay every month to the financial institution against the loan you have availed. It is a sum of the principal amount and interest amount. This amount is auto-debited from your bank account on a pre-decided date.
Factors that Affect EMI:
Three factors can influence the EMI amount of your loan:
Loan Amount: The loan amount has a direct relationship with EMI. Higher the loan amount, the higher the EMI.
Loan Tenure: The duration of the loan is another important factor that impacts your EMIs. An increase in tenure will decrease the EMI amount, but you will end up paying more interest to the bank or the financial institute.
Rate of Interest: Other than your loan amount, your EMI largely depends on the type of your interest rate. At a flat interest rate, your EMI will not change during the loan period. If it is a floating or reducing balancing method, the interest rate, and EMI will change whenever the lender changes loan policy. However, you can avoid the changed EMI rate by increasing or decreasing the loan tenure.
Other Factors in EMI:
Apart from the floating interest rate, there are two more reasons which lead to a change in EMIs:
1. Prepayment of loan: Your EMI decreases when you make part payment of your principal amount. Also, if you do not want to change the EMI, you can even ask for a change in the tenure of the loan.
2. Progressive EMIs: Some people take a loan for starting a new business and might be unable to pay huge EMIs right at the beginning of the loan. They opt for paying a fixed EMI in the beginning and later pay larger EMIs as their business grows.
How Is EMI calculated?
The standard formula to calculate your EMI is: EMI = P × R × (1+R) N / [(1+R) N-1].
Here, P is the principal amount, R is the rate of interest and N is the tenure of the loan. To calculate your EMI instantly, use the StashFin EMI calculator.
An amortization schedule is a table that gives you a summary of your loan. This table comprises periodic loan payments, principal amount and interest amount, schedule of payments, and loan outstanding.
Calculating EMIs is not difficult these days. With online EMI calculators, you can calculate upfront the EMI amount for the loan you wish to take and accordingly plan your borrowings. It makes it easy for you to apply for a loan with an EMI that you can comfortably pay off.