Personal Loans are very useful financial instruments provided by banks and NBFCs (Non-Banking Finance Companies) to customers. Personal loans are used normally for emergency purposes like medical expenses, home renovation, home furnishing, marriage expenses, as well as for purchase of vehicles and electronics. The amount available for personal loan depends on the credit worthiness of customers, which is determined by credit scores.

Personal loan repayment can be done through equated monthly instalments or EMIs, in which the entire payback amount with interest is divided into equal parts for convenient repayment. The division of amount can be done flexibly. For instance, if the amount to be paid with interest is INR 1,00,000, it can be paid back in 5 monthly instalments of 20,000 or 10 monthly instalments of 10,000. Each instalment or EMI repays a specific portion of the total due amount.

EMIs can be determined through mathematical formulas which are used by banks to determine EMI amounts for loan payments. EMI amounts differ on the basis of principal amount, rate of interest, tenure of payment, and the method of calculating interest. However, across different banks and financial institution, the EMI amount remains similar if the principal amount is the same.



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EMI Calculation Formula

There are two methods of calculating EMIs: fixed interest rate and reducing compound interest. For fixed interest, the method is simple. For instance, if you have to pay back 50,000 with 10% interest added to EMI, the total amount to be paid is 55,000. Accordingly, the EMIs can be divided into 11 equal instalments of 5,000 or increased as per convenience as well. On the other hand, reducing balance EMIs are calculated quite differently, as the interest reduces with a reducing principal amount.

You can understand the difference between the two types of calculation by using the same principle and calculating the EMI. For an amount of INR 1,00,000, the total interest will be 60,000 on a fixed rate, and 33,789 on a reducing balance-based interest rate. While there are loan calculators available for calculating EMI for loan payment, if you want to calculate the amount manually, you can also use a formula to do so. The mathematical formula for obtaining EMI amount is: EMI = [P x R x (1+R)^N]/[(1+R)^N-1], in which P is the principal amount, r is the interest rate, and N is the number of instalments.

You can understand the calculation by getting an insight regarding the inherent concepts:

Loan Amount: The loan amount used for EMI is the principal amount that is borrowed by you from the bank/NBFC. You can set this amount as P.

Interest Rate: The rate of interest offered by the bank/NBFC can be fixed/reducing balance method. In case of changing EMI rates, you might require re-calculating by using the formula. You can set the interest rate as I.

Loan Tenure: While in some loans, the tenure is predefined by the banks, sometimes you have option to set the EMI as per your convenience and capacity. In any case, you can set the defined tenure as N.

If you face difficulty in calculating the EMI amount, you can also use a loan calculator or EMI calculator, which are available online, for both fixed and reducing balance methods.