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What Is EMI And How Is It Calculated?

By: Bankbychoice.com0 comments

Now a day’s EMI (equated monthly installment) is integral part of everyone’s life.  Right from pursuing your education, constructing your home or to fulfill any your personal requirements like a family visit back home, wedding in your family and much more, finance facility is provided by Banks and NBFCs and you will pay them back with interest component via an equated monthly installment ie., EMI.

In other words, An equated monthly installment (EMI) is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly installments are used to pay off both interest and principal each month so that over a specified number of years, the loan/credit facility is paid off in full.

Components of EMIs:

EMIs mainly consist of two parts, namely the principal amount and the interest component. The interest is charged on the principal amount, which is then spread across each month of the loan tenure.

In the early years of the loan, a huge portion of the EMI consists of the interest amount that is payable by the borrower. As the loan matures and the principal progressively gets paid, the outstanding loan amount reduces simultaneously. The interest part thus becomes lower than the principal amount.

Loan Amortization Schedule

Loan amortization schedule is a tabular presentation of the loan with the EMI payment. It shows the break up between the interest component and principal component of a particular EMI payment.

This schedule helps the investor to examine how the loan is being paid and how much outstanding loan is left to be paid. It contains information like time period of payment, EMI, interest, principal payment and the outstanding loan.

How to calculate an EMI?

Given below the mathematical formula to calculate an EMI.

EMI= P x r x (1+r) ^n/ ((1+r) ^n – 1)

Here:

‘P’ is the amount that you want to borrow.

‘r’ is the rate of interest that is applicable on your loan. It is calculated on a monthly basis instead of the annual rate of interest.

‘n’ is the duration of the loan in terms of months.

Let’s take an example to calculate EMI using the above formula assuming the loan is AED 10, 00,000 at 9% p.a. for 15 years.

Principal amount = Rs. 10, 00,000

Monthly interest = 0.09/12 = 0.0075

N = 15 years, or 180 months

EMI = (10, 00,000 x 0.0075) x (10.0075) to the power of 180/ [(1 0.0075) to the power of 180]-1

Therefore your EMI = AED 10,142.67, which is a combination of both the interest and principal portion of the loan, to be paid each month.

Wait; are you getting confused here with complex mathematical formulas? We have a simple solution for you, we have various online EMI calculators to help you.

Pls ensure you make use of these free online EMI calculators to know how much you need to pay each month so you can plan your finances accordingly!

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