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How EMI Is Calculated on A Personal Loan?
A personal loan isan effective option to meet your immediate and unplanned financial needs.Whether it’s something planned like a wedding or remodelinga kitchen, or a contingency like a medical emergency, a Personal Loan can help you raise funds quickly.
A Personal Loan is a multipurpose loan with the minimum number of documents required, such as proof of ownership, income, and address. Once the necessary documents are submitted, the loan is processed quickly and usually disbursed within hours. With no collateral requirement, the borrower can breathe easy and focus on an effective repayment system. Also, Personal Loans usually have some basic eligibility criteria such as a minimum monthly income and good credit history (indicated by credit score).
An Equated Monthly Installment (EMI) is a fixed monthly payment made by a borrower to a creditor on a specified day each month. EMI is applicable every month on both interest and principal, and the loan is paid off in full over a few years.
EMI is dependent on several factors, such as
1) Principal
2) Interest rate
3) Term of the loan
For a fixed interest rate loan, the EMI remains fixed for the entire tenure of the loan, provided there is no default or partial payment in between. EMI comprises both the principal and interest components of the outstanding loan. The first EMI has the highest interest component and the lowest principal component. With each subsequent EMI, the interest component keeps on decreasing while the principal component keeps on increasing. Thus, the final EMI has the highest principal component and the lowest interest component.
If the borrower prepays during the tenure of the current loan, either the subsequent EMIs get reduced or the tenure of the loan gets reduced or a combination of both. The reverse occurs when the borrower waives EMI during the tenure of the loan (check dishonor/bounce or auto deduction of EMI or insufficient balance in case of default) In that case, either the subsequent EMI gets increased or the tenure of the loan gets extended or a combination of both, besides inviting financial penalties.
Similarly, if the interest rate decreases during the tenure of the loan (as in the case of floating rate loans) the subsequent EMIs are reduced, the tenure of the loan falls or a combination of both. The opposite happens when the interest rate rises.
The EMI on your Personal Loan or any other type of loan is calculated by this formula:
EMI =[P*(R/100) * {1+(R/100)}^N]/[{1+(R/100)}^(N-1)]
Where
EMI= equated monthly instalment
P= the principal amount borrowed
R= loan interest rate(monthly basis)= annual interest rate/12
N= loan tenure (in months)
Let us assume that a borrower borrows a sum of Rs. 8lakh at a rate of 12% for a tenure of 5 years, the interest for the 1st month will be as follows
(8,00,000*0.12/12)= 8000
And the EMI will be calculated as follows:
EMI = [8,00,000*(1/100) * {1+(1/100)}^60]/[{1+(1/100)}^(60-1)] = 17,796
The total EMI payable is the sum of the interest and the principal amount.
Personal loans are “all-purpose loans”, which means you can get personal loans for any purpose, such as financing your travel or medical expenses, etc. As these loans are unsecured, the interest rate is relatively higher than a home loan. The Personal Loan EMI Calculator is a great tool that helps you calculate the EMI and check if it matches your repayment capability. It works with the same parameters as other EMI calculators, such as loan amount, duration, and interest rate. You can edit the fields in the calculator to find the right combination of Principal, interest rate, and tenure that results in the EMI that suits you.
Here are some of the benefits of using an EMI calculator for personal loans
Enter the amount of the loan and adjust the interest rate and duration to get an idea of the EMI you have to incur every month.
Calculating EMI takes less than a minute when using the personal loan EMI calculator. Also, EMI calculators are very easy to use and 100% accurate.
Key in different loan tenures and find out the effect on EMI in each case. If you are ready to pay a higher EMI and would like to close your loan early, go for a shorter period. If not, you can always choose a longer tenure.
The personal Loan EMI calculator gives you a complete breakdown of your payment schedule. That way you will get an idea of how much you must pay every month and its bifurcation into principal and interest.
You can verify your payment schedule as provided by the lender using the personal loan EMI calculator.
Personal loans are mostly unsecured, which means that the loan is not backed by any assets that the lender can attach in case the borrower is unable to repay the loan. Unsecured loans are only supported by your creditworthiness and usually, come with a high-interest rate to reflect the additional risk incurred by the lender.
Loans can also be secured, that is, financed by something of value, called collateral. The thing you give to ensure that the lender will repay the loan is known as collateral. A home loan is an example of a secured loan because your home serves as collateral. A secured loan usually has a lower interest rate because the lender takes less risk.
Key factors affecting the total amount of your EMI payable include the following
For the same duration and interest rate, the higher the principal, the higher the EMI.
The higher the interest rate, the higher your EMI payment and the total interest paid on your loan.
If you choose a longertenure, the EMI payment will decrease compared to a shorter term. But longevity leads to higher interest paid overtime.
If you are looking to apply for a personal loan, here are a few tips to help you earn the lowest interest
A high credit score reflects better creditworthiness of the borrower. Banks and financial institutions offer loans at lower interest rates for applicants with a high credit score. Therefore, you should check your credit score before applying for a personal loan. If your credit score is below 750, you should look for ways to improve it. You are more likely to get a loan at a lower interest rate if your credit score is above 750.
If you miss out on the repayment of a loan or a credit card, your credit score may be severely affected. Lenders usually consider your payment history before deciding on personal loan interest rates. Individuals with a good history of loan repayment can get a lower interest rate on their loans.
Banks and financial institutions generally offer special interest rates for a limited period during the holiday season. If you apply for a loan while such an offer is available, you may geta lower interest rate.
Before applying to a particular lender for a personal loan, it is necessary to compare the interest rates on personal loans charged by various lenders. This will allow you to get a personal loan with a competitive interest rate.
Now that you know how to calculate EMI on a loan, you can simply use the variables such as Principal, interest rate, and tenure to find an EMI that suits you. In this digital age, Personal Loans are available with just a few clicks. With Poonawalla Fincorp you can easily get a Personal Loan in very simple steps.
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