When you take a loan from a bank or any other financial institution, you will have to repay it over a specific period of time, as mutually decided between you and the banking institution you are taking the loan from. Over this period, you have to repay not just your loan amount but also the interest that the bank will charge on it. Adding both components together, which are called principal component and interest component, will amount to the total amount of money you will have to pay back to the bank. Now this total amount is divided equally by the total number of months over which you have decided to repay the loan. This is called Equated Monthly Installments (EMI). However, the principal and the interest components are not equal in your installment.

As a rule, in the initial stages of your EMI schedule, your interest component will be more than your principal component, but as time passes, this balance shifts, and while the interest component of your EMI gradually decreases, the principal component increases. Many people find this to be a tricky issue, so here we try to explain how to calculate the interest rate on your loan as a whole. Since, interest rates are calculated on a yearly basis, you should know how to calculate the principal and interest components separately for each month. There are many online loan EMI calculators which you can use to do this, but let’s try to simplify the process.

Separating the Principal and Interest Components for Each Month

You can make this calculation using a simple excel sheet in the following manner:

  • For EMI: PMT (i,n,-p)
  • For principal: PPMT (i,x,n,-p)
  • For interest: IPMT (i,x,n,-p)

Here ‘I’ stands for monthly rate of interest, ‘n’ for number of payments to be made (loan tenure in months), ‘p’ is principal, ‘x’ is the month for which you wish to calculate principal and interest components separately.

For instance:

If the principal amount is Rs 10 lacs [p];

If the annual rate of Interest is 12 percent per annum, andmonthly interest rate 1 percent[i];

Tenure of loan is 20 years [240 months=n].

Now emi=pmt [0.01,240,-1000000] = 11,011

Now for principal in the 10th month –

Principal = ppmt [0.01,10,240,-1000000] = 1106

For calculation of interest, replace ppm with opt and result will be 9905

Know about your Interest & Principal with PaySense

It is important to know the interest and principal components of your loan not only for the full tenure but also for each month. You can use the PaySense loan EMI calculator to do this.  The reason is that it makes it easier for you to calculate your best time to pre-pay your loan, if you happen to be thinking in those terms, or if you get some money from some unexpected avenue and want to unburden yourself of the monthly EMI and pay up in full.