Personal Loans are being offered by various banks, lending institutions, and non-banking financial companies (NBFCs) at attractive interest rates. These loans are unsecured, meaning lenders don’t require collateral to lend you funds. Personal Loan repayment works in the form of Equated Monthly Instalments (EMIs). You must pay Personal Loan EMIs every month over your loan tenure to repay the borrowed amount.
Your Personal Loan EMI depends on three factors, your loan amount, your loan tenure, and the interest rate offered to you. The loan amount Is the first and foremost determinant of your EMI. If your loan amount is on the higher side, your EMI amount will also be higher. The interest charged on your loan also impacts your EMI in the same way. Similarly, if your loan amount is lower, the EMI amount will also be low.
However, your loan tenure impacts your Personal Loan EMIs in a different manner. The longer the loan tenure, the lower will be your EMIs as compared to a shorter loan tenure. In addition to this, the more interest you pay, the higher will be the EMI.
How is Personal Loan EMI calculated?
Simply knowing about the factors considered while calculating your monthly EMIs is not enough. You also need to understand how Personal Loan EMI is calculated by the lenders. You might have wondered how lenders come up with a monthly figure for your payments and you might have wanted to recheck it.
The principal figure of your monthly EMIs changes as you make payments every month. The interest rate is charged on it accordingly. Hence, the interest calculation works on the reducing balance method. Below is the mathematical formula used to calculate EMIs.
EMI = [P x R x (1+R) ^N]/[(1+R) ^N-1]
Here, P= loan amount or principal
R= interest rate per month
N= number of monthly instalments
In case you don’t want to calculate your EMIs manually, you can use the formula tab on Excel. The formula you need to put in is
=PMT(rate,nper,PV, fv, type)
where,
rate = interest rate that is applicable to the loan
nper = total number of payments
PV = principal amount
Fv = optional field
Type = optional field. Set to 0 if the payment is due at the end of the period and set to 1 if the payment is due at the beginning of the period
In addition to this, there are numerous EMI calculators available online. You can use easily find a Personal Loan EMI calculator online. The tool is easy to access and gives out automated results. You just have to enter your loan amount, loan tenure, and the interest rate offered to you by your lending institution. The online EMI calculator will give out an approximation of your monthly EMI amount.
Please note that the automated EMI amount is just an approximation of your monthly payments. Your EMI amount may vary as per your lender’s terms and conditions.
How does Personal Loan EMI work in India?
EMI is the most systematic way of repaying your loan. When lenders give you funds, they also charge interest on the amount. The interest is charged to safeguard the lender and compensate the lender for the risk involved in lending money. It also acts as remuneration to the lender for facilitating the lending process.
The borrowed amount is paid through monthly payments over a pre-determined period, i.e., your loan tenure. The disbursal of the loan is done in one go, but the repayment happens every month in the form of monthly instalments. Your EMI contains the principal amount and the interest amount. Each month, the pre-decided interest rate is charged on the reduced principal amount, which generates the interest amount.
To conclude
Personal Loans are unsecured credit products that are great for covering emergency expenses. When you borrow funds from a lender, you are supposed to repay the funds via equated monthly instalments (EMIs).
Your monthly EMIs are calculated based on three factors, your loan amount, loan tenure, and the interest rate offered to you. You can also use an online Personal Loan EMI calculator to determine your EMIs before you apply for the loan. This will help you create a monthly plan for your finances so that you don’t miss out on any monthly payments.
However, it is important to note that the online EMI calculator gives out an indicative amount. The amount given out by the tool will not be your exact EMI amount. Your actual EMI amount will depend on your lender’s terms and conditions and other factors.
