Know How to Calculate EMI (Equated Monthly Installments)

Buying a home is a dream of every Indian. When a person takes loan from a bank to buy a house for certain tenure, in that case he has to pay EMI (Equated Monthly Installments). EMI is the term used for the monthly payment made by a borrower to the lender towards interest and principal money borrowed. Following are the factors on which EMI for a loan depends:

Amount of Loan: EMI on the home loan primarily depends on the amount of loan you have taken. With the increase in home loan, the EMI to be paid also increases.

Tenure of the Loan: Next most important factor is the time for which you have taken the loan. The EMI decreases with the increase in the tenure of the loan. But one should understand the increase in tenure means that you will have to pay more interest to the bank. Since you will be having an outstanding amount against you for a longer time you will have to pay some extra for taking more time. EMI increases with the shorter tenure; in this case one should do the budgeting properly and make sure that the EMI can be made on time.

Complete your Loan as Soon as Possible:For a longer tenure of loan one has to pay more interest, so one should plan prudently and pay back the loan as soon as possible.

Fluctuation in Interest Rates: Interest rate is a floating parameter. It keeps changing with Inflation and changing policies of the government. One has to pay the EMI according to the prevailing interest rates. RBI has recently cut repo rate by 50 bases. Many banks have already reduced the interest rates accordingly, in this case the buyer will have to pay the EMI’s on the reduced rates and this will make a significant difference.

We have a formula to calculate the EMI manually. The formula involves the loan amount, interest rate and tenure of the loan (in months) as variables:

EMI (Equated Monthly Instalments)

M = Loan period in months

I = (Interest rate per Annum /12) / 100

L = Loan amount

^ = To the power

Let’s try to understand it using an example. Suppose Ram has borrowed Rs. 5 lakhs from a bank on the interest rate of 12% for 10 years.

Do in this case:

M (Loan period in months) : No of Years X 12 = 10 X 12 = 120

I (Interest rate per Annum /12) : ( 12/100) / 12 = .01

L (Loan amount) : Rs. 5 ,00,000

EMI (Equated Monthly Instalments)

So, in the example discussed above:

EMI, ram has to pay is Rs. 7147Total payment made by ram to the bank in 10 years (EMI X Total tenure in months (7174 X 120) is Rs 8,60,880The total interest rate payable will be (Total payment – loan amount) Rs. 3,60,88