Even if a person can afford to buy a home, a vehicle or pay for one’s education abroad by making the full payment upfront, people still prefer to take the loan route. Why? For the simple reason that when you take a loan — for instance a home loan — you get attractive income tax rebates on the interest component of the loan you repay. And besides, you can invest the surplus money you have in attractive shares, bonds or in other avenues to make your money earn more money.
But the catch here is that not all people are savvy enough to understand how the EMI on their loan is calculated, and are thus unsure about whether the EMI amount they are paying is reasonable or exorbitant. A loan EMI calculator can help overcome all such doubts.
The Tools and Formulaeto Calculate EMIs
You can calculate your EMI with an EMI calculation formula with the help of a simple calculator on your mobile or laptop, or even a physical electronic calculator.You can use the following formula to calculate your EMI: Equated Monthly Instalment (EMI)equals [P x R x (1+R)^N]/[(1+R)^N-1]. In this formula, ‘P’represents the loan amount or principal, ‘R’stands forper-month interest rate [so if the rate of interest per annum is 11 percent, then the interest rate will be 11/(12 x 100)], and lastly ‘N’stands for the number of monthly instalments. Using this EMI calculation formula, you can easily find out how much the monthly pay-out on your loan will be.
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Using the Excel-Sheet to Calculate Your EMI
Using an excel-sheet is also a very easy method of calculating your loan EMI. In the excel-sheet, the method of calculating the EMI is through PMT, and not by EMI. Here you will require 3 inputs. These inputs are rate of interest (rate), loan tenure of periods (nper), and the amount of the loan or its present value (pv).The formula to be used in the excel-sheet is: PMT(rate,nper,pv). It is important to note that the interest rate used in this excel-sheet formula needs be the monthly interest rate, which is 12 percent divided by 12 months which equals to 1 percent or 0.01.The ‘nper’ stands for number of periods, that is the number of EMIs. So, for example, if you have taken a loan of Rs 4.45 lakhs at an interest rate of 12 percent per annum for four years, the EMI calculation formula in the excel-sheet would be as follows: PMT (0.12/12, 4*12, 445,000) = 11,718
Tips and Tricks toMinimize Your EMIs
- The first and foremost consideration you need to keep in mind before you take a loan from a bank, or any financial institution, is to do your research thoroughly to find out which bank is offering the type of loan you want to take at the lowest interest rate and with the easiest repayment schedules.
- In case you have already taken your loan from a particular bank and then you come across another bank offering the same loan at a lower interest rate, then you always have the option of getting it refinanced by the other bank. This means that the other bank charging lesser interest rate will repay your existing loan in full, and take on your remaining loan burden themselves. You can use an online loan EMI calculator to find out whether this will work out cheaper. In such a scenario the important things to keep in mind are pre-payment charges of your existing loan, processing fees being charged by your new bank, legal fees, etc.
- Another trick to reduce your EMI is to stretch out your loan tenure a little bit more. However, in this case you will end up paying more interest eventually.
- Your present bank itself may agree to refinance your loan in case the industry interest rates have reduced, but if you have taken the loan on a fixed interest rate this may not be possible.
- Try to pay a couple of EMIs extra every year, particularly if you have taken a home loan where the tenure is pretty long. In case you wish to reduce the tenure of your loan, you can always request your bank to increase the amount of the EMI, which will automatically reduce the total duration of your loan.
- You can use EMI calculators online to ensure that you are not being short-changed.
- Whenever you get some extra money from some unexpected source you can useit to repay the principal component of your loan, which will substantially reduce the amount of your EMI.
Whatever method you use to reduce the burden of your EMI, the most important thing to always remember is that you must go with only the amount of EMI that you can afford to pay. In case you opt for a large EMI in order to reduce your tenure, you may have to cut corners in other household expenses, which may not be a very happy situation for you. On the other hand, if you opt for a lower EMI to have extra disposable income, you may end up wasting your money over unnecessary purchases. So, use an online EMI calculator to calculate the optimum EMI you ought to be paying.
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