When you borrow money through a personal loan arrangement, you commit to settling it in EMI (Equal Monthly Instalments).
Knowing how to calculate personal loan EMI payments can help you make an informed decision and choose a loan that fits your goals before submitting your loan application for approval.
The equal monthly instalment (EMI) for a personal loan comprises the amount borrowed, and the interest accumulated from borrowing money from a lender.
When you borrow money from a lending institution (lender), you agree to repay the loan and an interest amount for the service provided to you over time. Your regular payments go towards repaying the borrowed amount and the interest incurred.
For example, suppose your monthly EMI is ₹10000 – it could be divided into ₹7000 for the loan amount and ₹3000 for the interest component. Over time, with consistent payments on a loan or debt obligation, the portion allocated to interest diminishes while the amount dedicated to paying off the principal slowly rises.
What is EMI?
An EMI or an Equated Monthly Installment refers to the monthly shed tantamount with the amount that you pay toward repaying your personal loan. EMI or Residual Emi stands for Equal Monthly Instalments made up of two numbers i.e. principal amount and the amount of interest on the borrowed amount. It does not change over the tenure of the loan and affords you the opportunity to make the same payment every month towards your loan balance.
Things That Impact on Personal Loan EMI
Several aspects affect your personal loan EMI on a monthly basis, and knowing about these would assist you in calculating your personal loan EMI. Here are the key factors to consider:
- Loan Principal: This all sums up the amount that a borrower receives from the lender relieved from any charges. The amount borrowed has an influence on the rate of every monthly instalment payment, meaning that a high amount borrowed leads to a higher instalment payment.
- Interest Rate: It gives a remarkable insight into the fact that your EMI is also determined to a major extent by the interest that the lender is willing to offer you on your loan. If this rate rises, the EMI will go up and if it diminishes for any reason, then the EMI will go down.
- Loan Tenure: The nature of loan repayment means the period to be taken in paying back of the loan. You will be able to borrow a certain sum at a cheaper rate of interest by stretching your tenure as it reduces EMI. But it is going to cost you more as in interest charges would be higher. Whereas if the duration of the loan is short, the EMI will be excessively high but the interest paid as a part of the total is lesser.
Formula Behind Personal Loan EMI Calculation
While a Personal Loan calculator makes the process instant, knowing the basic formula helps you understand how your EMI is determined:
EMI = [P × R × (1+R) ^N] / [(1+R) ^N-1]
Let’s break this down into simple terms:
- P = The principal (the amount you want to borrow).
- R = Monthly interest rate (yearly rate ÷ 12).
- N = Total number of months for repayment.
Using a Personal Loan Calculator
Instead of solving complex mathematical equations, most borrowers use an online personal loan calculator. This handy tool instantly shows you your monthly payments. Here’s how to use one:
- Enter the loan amount you need.
- Input the interest rate offered by the lender.
- Select your preferred repayment period.
- Click “Calculate” to see your monthly EMI.
Key Factors That Shape Your EMI
Loan Amount
The bigger your loan application amount, the higher your EMI will be. For example:
- A ₹5 lakh loan at 12% for 5 years = EMI of approximately ₹11,122.
- A ₹10 lakh loan at 12% for 5 years = EMI of approximately ₹22,244.
Interest Rate
Even a small difference in interest rates can significantly impact your EMI. For a ₹5 lakh loan for 5 years:
- At 12% interest = EMI of ₹11,122.
- At 14% interest = EMI of ₹11,676 This is why maintaining a good credit score is very important – it helps to secure loans at lower interest rates.
Loan Tenure
A longer repayment period means lower monthly EMIs but higher total interest payments. For a ₹5 lakh loan at 12%:
- 3-year tenure = monthly EMI of ₹16,607, total interest of ₹97,858.
- 5-year tenure = monthly EMI of ₹11,122, total interest of ₹1,67,333.
- 7-year tenure = monthly EMI of ₹8,826, total interest of ₹2,41,415.
Making Smart Loan Decisions
Before finalizing your loan application, use a personal loan calculator to try different combinations of loan amounts and tenures. This helps you:
- Find an EMI amount that comfortably fits your monthly budget.
- Compare offers from different lenders.
- Understand the total interest you’ll pay.
- Choose the best repayment period for your financial situation.
Tips for EMI Planning
- Always calculate your EMI before applying for a loan.
- Keep your EMI within 40% of your monthly income.
- Compare EMIs across different loan tenures.
- Use a reliable personal loan calculator from trustworthy financial institutions.
Also Read – Top 6 Reasons to Get a Personal Loan
Ways for Reducing Your Personal Loan EMI
Now that you have your personal loan and are paying your EMIs, here are some tips to help you manage your loan effectively:
- Stick to your budget: Keep your personal loan EMI within your monthly income so that the monthly installments do not spoil your pocket. It is important not to overuse this system, because lateness or even non payments mean additional charges and rating down.
- Make extra payments: If possible, then it is wise to add some amount directly towards the loan balance. This will help to decrease the loan period to pay the loan, the total interest charged and thus bringing down your total cost of borrowing.
- Protect your credit score: Sustaining punctual payments of the EMIs will reverse all credit score harms and keep your score healthy. Failure to meet the agreed-upon payment schedule is likely to reduce your credit worthiness and further complicate your search for more loans or getting better interest rates.
- Be mindful of prepayment penalties: It is important to note that some of the available lenders require that one pay extra cash in case the borrower wants to clear the loan before the agreed time within a given term. Also, you must go through the loan agreement carefully and take into consideration if you have decided to repay before the loan period if there is a cost.
- Review your loan terms periodically: Your financial characteristics may change in the future and it becomes easier for you to make payments or to switch to the more successful type of loan. At times, assess your loan terms and reconsider the process you have taken regarding your loans.
Conclusion
The calculation of personal loan EMI is an important part of loan as it gives the required financial insight in terms of obligations to make better decisions. Hence, if you know the loan amount, the rate of interest and tenure of the loan you can plan the amount to be paid each month by way of using an EMI calculator. It can facilitate comparing loan offers with the help of various lenders.
Using a personal loan calculator makes the process straightforward. Taking time to understand your EMI calculations helps you avoid financial stress and make confident borrowing decisions.
Whether you are planning for home improvements, education, or emergency expenses, knowing your EMI commitments beforehand ensures a smooth loan repayment journey.
