In today’s fast world, loans have become an integral part of one’s life. It helps in achieving many financial and personal goals. Be it buying a sweet home or buying a car or funding education, it is a vital part of most people’s lives and through which people fulfill their dreams and aspirations of their life.
A loan is an agreement between two parties, namely, lender and borrower. In this agreement, a lender agrees to give a fixed amount to the borrower on the condition that the borrowed amount shall be paid back along with the interest over a pre-decided period. Now, when we discuss loans, one of the most frequent words used with a loan is equated monthly installments (EMIs).
What Is an EMI and How Is It Calculated?
To understand loan EMI calculator, we need to understand EMI and its calculation. EMI is a fixed monthly payment that the lender makes to the borrower on a specific date of each calendar month. EMI has two components, principal amount and interest so that, over a specified period, the entire loan amount along with interest is repaid.
Initially, the interest component constitutes a major portion of EMI payment but as we progress it reduces, and payment towards principal increases. Thus, the amount of monthly EMI installment primarily depends on three things: the amount borrowed, rate of interest, and tenure of a loan.
There is a formula to calculate the monthly amount of EMI. The formula is:
EMI = [P x R x (1+R) ^N]/ [(1+R) ^N-1]
In this formula variables refer for:
EMI is Monthly Equated Installment;
P is Principal Loan Amount;
R is Rate of Interest;
N is Tenure of Loan or number of Monthly Installments.
To understand it better let’s take an example. For instance, if a person has taken a loan of Rs. 1,00,000 for 2 years at an interest of 10% p.a. Now, firstly, we have to convert the annual interest rate into monthly interest rate and period into the number of months as we will be paying monthly installment.
To calculate the monthly interest rate, we have to divide the annual interest rate by the number of months in a year, so dividing 12 by 12 monthly interest will be 1% per month and similarly, the 2 years period will become 24 months or the number of monthly installments. Therefore, by filling up variables in the formula, the monthly EMI installment will be Rs. 4,707.
What is an EMI Loan Calculator and How Does It Work?
Now, the loan EMI calculator is a calculator, which can calculate the monthly EMI payment that one has to pay towards the loan. One can easily access loan EMI calculators from the website of a bank or on any other website of a financial institution. There are different types of loan EMI calculators such as the personal loan EMI calculator, business loan EMI calculator, housing loan EMI calculator, and education loan EMI calculator.
It makes the calculation of EMI through the above-mentioned formula easy and is a reliable and convenient tool for the calculation of the EMI installment amount. The person just has to fill in three variables, namely, amount, interest rate, and duration of the loan, and one can get results within a few seconds.
Principal Amount: The principal amount is the amount that the moneylender lends you as a loan. The principal amount is directly proportional to EMI, which means the higher the principal amount, the higher the EMI payment.
Rate of Interest: The rate of interest is the rate at which the lender agrees to give a loan to the borrower, and it is also directly proportional to the EMI payment.
Period or Tenure: The period or tenure is the period within which one has to repay the loan. But, here the tenure of the loan is inversely proportional to the EMI payment. Shorter the tenure, the larger the EMI amount that you will be paying.
How Does a Loan EMI Calculator Help You in Financial Planning?
One of the important functions that an EMI calculator performs is to plan your monthly budget and expenses efficiently so that every month one can set aside the amount towards the monthly EMI installment. Another important function of loan EMI calculators is to compute interest payable, and one can find different monthly installments that are payable according to corresponding interest rates and tenure of the loan. In this way, it becomes really easy to assess how many monthly installments one can bear in a month.
Types of Loan EMI Calculator
There are various types of loan EMI calculators depending on the individual’s needs. A few of them are listed as follows:
Personal loan EMI calculator
Personal loans are also referred to as all-purpose loans, and one takes them for many purposes such as funding medical expenses, travel, and shopping. This loan is unsecured generally the tenure of the loan is short and the interest rate is high. The personal loan EMI calculator becomes a crucial tool to assess your financial position and take risks in the form of a loan accordingly.
Business loan EMI calculator
Business loans are the loans that are taken to run or expand a business enterprise. In today’s competitive world, it is difficult to sustain and grow in the market without taking business loans. The reason being the limitation of availability of financial resources at the disposal; therefore, business loans play a crucial role.
The business loan EMI calculator helps in calculating the EMI payment promptly so that businessmen can take loans accordingly considering financial risk, available resources, and plans. A business loan EMI calculator is a handy tool for businesses in their day-to-day functioning as goods are often sold on credit by suppliers and manufacturers.
Education loan EMI calculator
With education becoming expensive day by day, arranging finances for funding education becomes important. With an education loan EMI calculator, you can calculate the monthly payment that you need to make to fulfill the loan amount. EMI of education loans is generally payable after the moratorium period that is six months after the completion of education or after a student gets a job whichever is earlier.
With an ever-changing world and ever-increasing aspirations of people, assessing and organizing one’s finances becomes crucial. With a loan EMI calculator, one can easily calculate and assess his/her financial ability to pay through EMI and can take a loan accordingly. It is a quintessential tool for financial planning and can help in achieving our aspirations and material goals.