Loans can sometimes be the perfect gift from the financial gods. If you were to think about it, they are sort of ‘get-me-out of financial jail pass’. Consider this scenario, your credit bill is huge and you are short on cash, what would be you next step. You can ask your family and friends, but as the adage goes, ‘money can be a sore topic between friends and family’. Well, your best option would be a personal loan. Sure, you will have to pay interest on it, but it will be way less compared to the amount you will have to pay if you do not pay your credit card bill. Loans help you in dealing with financial crisis, like the one mentioned above, by offering you a way to pay back the loan through EMIs.

EMIs are Equated Monthly Installments are monthly payments that you will need to make to the lender to pay back the borrowed amount. The EMIs help you with equal payments distributed over a period of time. Therefore, they ensure that you are not overburdened by the repayment of the loan. You can easily find an EMI loan calculator online to help you in determining your loan’s EMIs. The calculation of EMIs is dependent on various factors of the loan. Let’s check out the factors that affect EMI:

Factors that affect EMI

The first thing you should know if directly only four factors affect the EMI calculation. They are:

  • The type of loan
  • The amount of the loan
  • The interest rate
  • The tenure of the loan

There are other factors that affect the EMI of a loan indirectly such as your credit score, your financial status, etc. But, a loan calculator only account for the four factors mentioned above.

EMI Calculation Formula

Now that we are caught up on what are EMIs and what factors affect them, let’s check out the formulae used to calculate the EMIs. But, you should know that the type of formula that is used for EMI calculation is dependent on the type of loan. So, there are two formulae used for calculation, these are also used by EMI calculators online. The EMI Calculation Formula:

  • Fixed Interest Rate
  • Reducing Balance Method

Fixed Interest Rate: The fixed interest rate method calculates EMI by levying interest on the principal amount i.e. the original amount that was borrowed. The principal amount does not change throughout the period of the loan. This method is primarily used for car loans and two-wheeler loans.

The EMI calculation formula for fixed interest rate is: EMI = (Principal + Interest)/Period in Months

Interest = PRT/100

Let’s see the formula in action; for example, to buy a bike, Rohan borrows a loan of INR 1.5 lakhs with an interest rate of 18% and loan tenure of 3 years. Under the flat rate method, the interest will always be paid on the amount INR 1.5 lakhs.

So, for Rohan, the calculation of EMI will be:

Interest to be charged: (1,50,000 x 18 x 3)/100 = 81000

So the EMI = (1,50,000 + 81000)/36 = 6416.66

Thus, the EMI would be INR 6416.66

Reducing Balance Method: The reducing balance method calculates EMI by levying interest on the amount that is outstanding and not on the principal amount. This method is used for personal loans and education loans.

The EMI calculation formula for reducing balance method is: EMI = [P x R x (1+R)^N]/[{(1+R)^N}-1]

Here, P is the principal amount, R is the rate of interest, and N is tenure of loan.

Taking the same example as above, the EMI would be:

EMI = [150000 * 18 * (1+18)^3]/{(1+18)^3}-1] = 5423

Thus, the EMI would be INR 5423

Now you know the formulae used by a loan calculator to calculate EMI, you can calculate them yourself if you feel like it or if the internet isn’t working.

Perfect EMIs with PaySense

A very important question people do not ask themselves when applying for a loan is: what to look for in a lender. Well, you want the lender to offer good interest rates, appropriate tenure, good amount of loan, etc. One key element that people often forget but wish for the most is instant documentation and approval process. Well, your wish has been granted. PaySense offers instant loans up to INR 2 Lakhs. The documentation process is streamlined and the approval is lightning fast. Wait, there is more, the interest rate is dependent on a variety of factors including your credit score, financial history, annual income, type of employment, etc. So, the ball is figuratively in your court. Additionally, you can use the loan for a plethora of reasons such as paying your credit card bill, wedding, vacation, buying a bike or car, education, etc. Moreover, you can use the EMI calculator online to ascertain the perfect EMIs for you and plan your expenses for the tenure of the loan accordingly. So, download the PaySense app now!