Important things to Know Regarding EMIs

There is no doubt that EMIs play an important role in repaying the borrowed amount and an EMI calculator can be a great help in this context. Apart from the principal amount, rate of interest and tenor, another usual and significant term connected with any loan whether personal, home or business is equated monthly instalment or EMI in short.

Defining EMI

EMI is a pre-decided and settled amount of money that you need to pay the lender regularly on a particular date for repaying the loan and you can accomplish this through cheque, online payment is also acceptable. Feel free to use online EMI calculator for finding out the amount of EMI as well as chalking out a schedule of repayment, ensuring that you never default.

What affects your EMIs?

• The loan amount

Your EMI depends on the principal amount that you have borrowed. EMI is proportional to the loan amount, meaning a higher loan amount leads to bigger EMI.

• Rate of interest

The interest rate is an important factor that affects your EMIs. The lender calculates the interest considering various factors such as your earning, the capacity of repayment, the prevailing situation of the market, your credit history and so on.

• Loan tenor

It is the third factor, affecting your EMIs. Usually, if the tenor is longer the EMIs stay low and vice versa. Though, the interest outgo will be higher if the tenor is longer.

EMI components

• Principal
• Interest

Initially, the principal amount is lower compared to the interest. Still, the amount of interest reduces with the progress of the loan tenor. Though, there are some loans where you get the opportunity to pay the principal amount once the tenor ends, reducing the EMIs drastically.

Can EMI change?

Floating rate

If you select floating rate of interest, the interest may change along with the market dynamics. When the interest rate falls, your EMIs also reduce.

Prepaying the loan

You can change your EMI by prepaying a certain part of the loan amount.

Progressive EMI

With progressive EMIs, you get the chance of paying a particular amount as EMI initially, which progressively raises with the increment in earnings, allowing you for paying off the loan rapidly.

Using EMI calculator

• Pick an EMI calculator
• It will ask to input details such as the principal amount, interest rate and tenure
• After entering these components, the EMI calculator will be generating the EMI amount that you need to pay
• You can also try various parameters for finding the most suitable EMI option compatible with your financial planning

How it works

EMI calculator should be considered as a useful tool for calculating the EMI amount and in order to accomplish that it uses the following formula

EMI= [P x R x (1 + R) ^N]/ [(1+R) ^N-1]

The alphabets mentioned in the formula are variables, meaning the EMI amount changes each time the variables are changed. P stands for the ‘principal amount’, R denotes ‘rate of interest’ and N represents ‘number of years’, the given time for the repayment.