The term Equated Monthly Installment (EMI) is a part and parcel of our daily life. Also, it facilitates the dreams of thousands of people every day. EMI, as we know, is the payment of a fixed ransom to the lender by a borrower every month. Additionally, the determination of the amount happens before the initiation of payment. Also, the borrower should continue the payment till the remission of the total amount. It simplifies your life by deciding the ransom in advance. The amount is the summation of the principal amount and the amount of interest. You can opt for EMI when you take a student loan, auto loan or even a mortgage loan. It works splendidly and eases out the procedure. A home loan EMI calculator is also available that simplifies the task.
How Equated Monthly Installment (EMI) Works?
Unlike the variable payment plans, the borrower cannot change the payment ransom according to his/her convenience. Rather, one has to pay the fixed ransom at a specific time interval. This mode of payment provides greater management of finances than any other mode. Also, it is beneficial to both the borrower and the lender. In recent times, EMI is gaining the attention of a large customer base. Hence, many service providers are keeping EMI services open. You can buy several products online by opting for EMI. Flipkart, Amazon, Nykaa etc are opening their arms wide to facilitate such services with utmost ease. Furthermore, you can use a home loan EMI calculator to know the exact value you have to pay every month.
Calculating Equated Monthly Installment for Home Loan:
In this section, you will get the answer for how to calculate home loan EMI? Primarily, there are two distinct methods of calculating EMI:
- The Reducing Balance Method and
- The Flat Rate Method
The Reducing Balance Method:
In the reducing balance method, there is a reduction of the principal amount from the outstanding. On the other hand, the calculation of interest happens after the principal value reduction. In this method, the following formula is under use to calculate EMI:
(P ✕ I) ✕ ((1+r)n)/ (t✕(1+r)n)
In this formula,
‘P’ represents the borrower’s principal amount
‘I’ represents the interest rate per annum on the amount
‘r’ represents the payable monthly interest rate
‘t’ represents the months in that year and
‘n’ represents the total payment for a month
The Flat Rate Method:
In the Flat rate method, EMI calculation happens by the summation of the loan’s principal amount and the principal sum’s interest. After the summation, divide the outcome (total) by the number of periods. Then there should be a multiplication with the number of months.
To clarify the above, let us take an instance:
Suppose, you borrow a home loan of Rs 5 lakhs at a rate of interest of 7%. And if the tenure of the loan is 10 years. Then as per this method, the following will be the calculations:
EMI = (5,00,000+(5,00,000 ✕10 ✕ 0.070))/10✕12= 7083
Therefore, following the flat rate method, your EMI value will be Rs 7083. That implies you will have to pay an instalment of 7083 every month for 10 years.
Factors Affecting Equated Monthly Installment (EMI):
The provision of EMI plan at different domains of life makes things and commodities accessible to us. However, several factors might impact Equated monthly instalment. Some of the crucial factors that affect an EMI are:
- Duration of the loan
- The principal amount of the loan and
- The Interest rate
Duration of the Loan:
The tenure of EMI is of major importance. It is the time up to which the borrower has to pay off all the due payments of EMI. However, insisting on paying EMI for a longer span is not a good idea. The longer the tenure more the rate of interest you will have to pay. You will get a long duration to repay, however, you will end up paying a larger amount.
Principal Amount of the Loan:
The principal value of a loan is the actual ransom that you want to borrow from a lender. This is the most integral factor that will determine the EMI amount. That implies greater the principal amount greater will be the value of EMI.
The interest rate is a variable that is dependent on the lender. The value may vary from agency to agency. Also, you have to pay it along with the principal amount. This is a crucial factor on which the EMI value is dependent.
EMI is a boon to society. It is opening many doors to the customers. Additionally, you can buy things that are out of your budget. It is easy on your wallet and gives you time to save money. Calculating EMI is also simple. You can calculate it by knowing just a few values. Many lenders plan the EMI according to the limits of the borrower. Hence, paying EMI is getting less demanding with time.