What is EMI?

EMIs are Equated Monthly Instalments for repayment of the loan amount over a fixed duration. EMIs have two components – principal amount and interest amount. Principal amount is paid back on the total loan amount availed and interest amount is additional to it paid as the cost to the lender for availing the benefits of loan.

How are EMIs calculated?

EMIs are either calculated on a flat or a reducing balance interest rate.

Flat Interest Rate

Under this, interest is calculated on the initial loan amount that you availed and this is applicable for throughout the loan tenure. Hence, the interest is same for all months. Flat rate is generally applied for car loan EMI calculator.

The mathematical formula to calculate EMI for this method would be:

EMI = (Principal + Interest)/Period in Months

Reducing Balance Interest Rate

Under this, interest is calculated on the remaining or outstanding balance of the loan amount initially availed. Hence, the interest is different for different months.

The mathematical formula to calculate EMI for the reducing balance method would be:

EMI = [P x R x (1+R)^N]/[{(1+R)^N}-1]

Here P is the Principal Loan Amount, R is the Rate of Interest (on a monthly basis), and N is the Tenure or the loan duration in months.

Calculation Example for Both Methods

For better understanding, let us consider the following example and calculate EMI for both methods:

Suppose Rohan borrows a sum of INR 1.5 Lakhs at an interest rate of 10% for a tenure of 3 years.

The yearly interest would be INR 15,000 and hence the interest for 3 years would be INR 45,000.

Based on this, calculation for this using flat interest rate EMI calculator would be:

EMI = (150000 + 45000)/36 = 5416.67

For the same example, if we calculate using the reducing EMI calculator:

EMI = [150000 x 10/(100*12) x (1.0083)^36]/[{(1.0083)^36}-1]

       = {1250 x 1.3482}/0.3482

       = 4840

Moreover, under the reducing balance method, the principal amount already paid gets deducted for the calculation on interest rate of the subsequent period. Hence, the interest is charged on the new balance and this makes the reducing balance method much more economical than the flat rate method.

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Apart from these two simple methods, you can also calculate EMI on excel using the PMT function and understand everything about personal loan EMI calculator. Moreover, you can also use the online EMI calculators to understand the amount you will need to pay every month. It is advisable to keep your interest and EMI calculations handy before even availing the loan so that you are fully aware of the amount you will have to shed from your pocket every month. While loans are now available online, PaySense provides you a quick turn-around time for your loan application in just three simple steps. Avail easy instant loans of up to INR 2 Lakhs now.