A personal loan can be a great financial tool for managing various expenses, such as medical emergencies, home renovations, weddings, or debt consolidation. However, before taking a loan, it is crucial to calculate your EMI (Equated Monthly Installment) to ensure that your monthly budget can accommodate the repayment.
An EMI is the fixed monthly payment you need to make toward your loan. Understanding how it is calculated helps you plan your finances, choose the right loan tenure, and compare different loan offers effectively.
In this blog, we’ll cover:
- What an EMI is and how it works
- The EMI calculation formula
- How to use an EMI calculator for quick results
- Factors that affect your EMI amount
- RupeeQ insights on optimizing your loan repayment
What is an EMI and How Does It Work?
Equated Monthly Installment (EMI), is the fixed monthly amount you repay to the lender, consisting of:
- Principal Amount: The original loan amount borrowed.
- Interest Component: The cost charged by the lender for borrowing the money.
Each EMI includes both principal and interest components. In the early months of repayment, a larger portion of your EMI goes toward interest, while in later months, a greater portion is applied to the principal amount.
Example of EMI Breakdown
Suppose you take a ₹5 lakh personal loan at 12% interest for 5 years. Your EMI would be ₹11,122 per month.
- In the first few months, most of this amount goes toward interest repayment.
- Over time, as interest reduces, more of your EMI starts repaying the principal balance.
How to Calculate EMI for a Personal Loan?
Formula for EMI Calculation
The basic formula that works in calculating EMI is as follows:
EMI = P x R x (1+r)^n/((1+r)^N – 1
where
‘P’ stands for principal amount
‘R’ denotes applicable rate of interest
‘N’ stands for the loan term or tenure
By using this formula, you can easily calculate the monthly installment of your loan. However manual calculations are more prone to errors leading to a wrong decision. In such a case, an EMI calculator comes into play.
Example Calculation Using the Formula
Let’s say you borrow ₹3 lakh at 14% interest for 3 years (36 months).
- Convert Annual Interest Rate to Monthly Rate
- 14% per annum = 14 ÷ 12 ÷ 100 = 0.01167 (or 1.167% per month)
- Substituting Values in the Formula
the EMI for this loan comes out to be ₹10,261 per month.
RupeeQ Tip – Manual EMI calculations can be complex. Instead, use the RupeeQ EMI Calculator to get instant and accurate results without any hassle.
Using an EMI Calculator for Quick Results
Instead of using the formula manually, you can use an online EMI calculator to instantly compute your monthly payments.
How to Use an EMI Calculator?
- Enter the Loan Amount – Input the total amount you wish to borrow.
- Select the Interest Rate – Enter the rate offered by your lender.
- Choose the Loan Tenure – Set the repayment period in months or years.
- Click ‘Calculate’ – The calculator instantly displays your EMI amount, total interest payable, and total repayment cost.
Example Using an EMI Calculator
For a ₹5 lakh loan at 10% interest for 4 years, the EMI calculator will show:
- EMI = ₹12,672 per month
- Total Interest = ₹1,08,256
- Total Repayment = ₹6,08,256
RupeeQ Tip – Use RupeeQ’s EMI Calculator to experiment with different loan amounts, tenures, and interest rates before finalizing your loan decision.
Factors That Affect Your EMI Amount
1. Loan Amount (Principal)
- Higher loan amounts lead to higher EMIs.
- Always borrow only what you need to avoid unnecessary financial burden.
2. Interest Rate
- Higher interest rates result in higher EMIs and overall repayment costs.
- A higher credit score (750+) can help you secure lower interest rates.
Example:
For a ₹5 lakh loan over 5 years:
- At 10% interest, EMI = ₹10,624
- At 15% interest, EMI = ₹11,895
A 5% increase in interest rate raises EMIs by ₹1,271 per month.
3. Loan Tenure
- Shorter tenure (1-3 years) = Higher EMI, lower total interest paid.
- Longer tenure (5-7 years) = Lower EMI, higher total interest paid.
Example:
For a ₹4 lakh loan at 12% interest:
- 2-year tenure EMI = ₹18,823, Total Interest = ₹52,742
- 5-year tenure EMI = ₹8,899, Total Interest = ₹1,33,940
4. Prepayments and Part-Payments
- Making lump sum prepayments reduces outstanding loan balance, leading to lower EMIs or faster loan closure.
RupeeQ Tip – If possible, make early repayments to reduce total interest costs and shorten your loan tenure.
How to Choose the Right EMI for Your Personal Loan?
To ensure that your EMI remains manageable, follow these steps:
Step 1: Keep EMIs Within 40% of Your Income
Lenders prefer that your total loan EMIs (including existing loans) do not exceed 40% of your monthly income.
Example:
If your salary is ₹50,000, keep your total EMIs under ₹20,000 for financial stability.
Step 2: Choose a Comfortable Loan Tenure
- If you prefer lower EMIs, opt for a longer tenure.
- If you want to save on interest, choose a shorter tenure.
Step 3: Compare Lenders for the Best Rates
- Use RupeeQ platform to find and compare the lowest interest rates and best EMI options.
Step 4: Use an EMI Calculator Before Applying
- Enter different loan amounts and tenures to see which EMI fits your budget.
Final Thoughts: Plan Your EMI Before Taking a Loan
A Instant personal loan should be affordable and easy to repay. By calculating your EMI in advance, you can ensure that your loan fits your budget and avoids financial stress.
Key Takeaways
- EMI is a fixed monthly installment that includes both principal and interest.
- Use the EMI formula or online calculators to compute your monthly payment.
- Loan amount, interest rate, and tenure significantly affect EMI costs.
- Keep your EMIs within 40% of your monthly income for financial stability.
- Compare multiple lenders on RupeeQ to find the best personal loan deals.
