What Is EMI and How Is It Calculated?

With the rise in inflation, our purchasing power has decreased, leading to dependency on loans. Today, before buying an expensive item, the first thing that crosses our mind is how to procure a loan for it. Thanks to the easier loan application process at StashFin, you do not have to run pillar to post to get your loan approved.

Opting for a loan can set you free from the worries of other unplanned or accidental expenses. But before applying for one, let us understand the basic component of a loan, i.e. EMI.

What Is EMI?

EMI (Equated Monthly Installment) is a fixed amount you have to pay every month to the bank or financial institution against the loan you have availed. This amount is auto-debited from your bank account on a pre-decided date.

How Is EMI calculated?

EMI is a sum of the principal amount and interest amount. While taking the loan you will be asked whether you want to take it at a flat or floating interest rate. If you opt for a flat interest rate, the rate of interest and EMIs will not change throughout the tenure of loan. Whereas in floating or reducing balancing method, the rate of interest and EMI amount will change whenever the lender resets the interest rate. However, you can avoid the change in the EMI amount by giving instructions to the lender to increase or decrease the tenure of the loan instead of changing the EMI.

Following is the formula for calculating EMI:

EMI = P*r*(1+r)^n/((1+r)^n-1)

Here, P is the principal amount, r is the rate of interest and n is the tenure of the loan.

Apart from the floating interest rate, there are two more reasons which lead to a change in EMIs:

1. Prepayment of loan: If you have excess cash in hand, you can make part payment of your loan. With the decrease in the principal amount, the EMI will also decrease. If you do not want to change the EMI, you can even ask for a change in the tenure of the loan.

2. Progressive EMIs: Some people take a loan for starting a new business and are currently unable to pay huge EMIs. They opt for paying a fixed EMI in the beginning and later on pay larger EMIs as they grow in their profession.

Factors Affecting EMIs

Three factors influence the EMI:

1. Loan Amount: The EMI has a direct relationship with EMI. Higher the loan amount, higher the EMI.

2. Rate of Interest: EMI increases with the increase in the rate of interest and vice versa.

3. Tenure: The duration of loan is another important factor that impacts your EMIs. An increase in the tenure will decrease the EMI amount, but you will end up paying more interest to the bank or the financial institute.

Amortization Schedule

An amortization schedule is a table which gives you a summary of your loan. This table comprises periodic loan payments, principal amount and interest amount, schedule payments and loan outstanding. This is a useful tool for those who wish to make part payment or foreclose the loan.
Calculating EMIs is not difficult these days. With online EMI calculators available, you can make your decisions properly. So keep your inhibitions aside and apply for a loan suiting your requirement.