Taking a personal loan is one of the quickest and most convenient ways to meet your financial needs. However, before you apply for a personal loan, it is very important that you assess your repayment capacity by calculating the Equated Monthly Installments (EMI).
EMI or Equated Monthly Installment refers to the fixed amount you pay each month to repay your loan within the agreed tenure. It consists of both principal amount and interest component. The EMI remains the same for the entire tenure of the loan. However, with each EMI, the interest component reduces and principal component increases.
EMI = Loan Amount x Interest Rate x (1+ Interest Rate)Number of Months/((1+Interest Rate)Number of Months – 1)
Factors that determine your EMI
The EMI you pay each month depends on three key factors:
Loan Tenure: The loan tenure is the time period within which you have to repay the loan. The longer the tenure, the lower your EMI.
Interest Rate: The interest rate is the annual rate charged by the lender. The higher the interest rate, the higher your EMI.
Loan Amount: The loan amount is the amount you borrow. Naturally, a higher loan amount translates into higher EMIs.
Why EMI calculation is crucial before applying
Calculating your EMI gives you clarity on the amount you need to repay every month before you apply for the loan. This is critical for several reasons:
- Assess repayment capacity
By calculating the EMI amount basis your income, you can analyze whether you will be able to pay the required EMI each month without defaulting. This gives you a clear picture of your repayment capacity.
- Budget monthly expenses
Once you know the EMI amount, you can plan your monthly budget and factor in the EMI as a fixed cost every month. This ensures you do not take up a loan with an EMI that strains your finances.
- Avoid financial stress
An unaffordable EMI can cause cash crunch every month and lead to financial stress. Computing the EMI beforehand helps take a personal loan well within your repayment ability. Use a personal loan EMI calculator to ensure you have a good idea about the EMI you need to pay.
- Informed decision making
Advance EMI knowledge enables you to make an informed borrowing decision, with complete clarity on the monthly payments involved. You can opt for a comfortable EMI plan that aligns with your income stream.
- Negotiate better terms
If the computed EMI is beyond your means, you can negotiate with the lender for better terms like lower interest rate or longer tenure to reduce the EMI to an affordable amount.
- Pick the right lender
By comparing EMIs across lenders using personal loan EMI calculators, you can identify the lender offering the best EMI terms for your chosen loan amount.
How to calculate your EMI?
Here are two easy ways to calculate your EMI before applying for a personal loan:
Use an online EMI calculator
Several websites and apps offer personal loan EMI calculators that allow you to compute your EMI in a few clicks. All you need to do is input parameters like loan amount, tenure, and interest rate to instantly get the EMI figure.
Use the EMI formula
You can also manually calculate the EMI using the formula discussed earlier in the article. While a bit more time-consuming than EMI calculators, this method allows you to understand the components of an EMI better.
Estimating your EMI in advance places the power in your hands to take a personal loan with full transparency on repayment obligations. Avoid surprises down the road by taking out time to carefully compute your EMI and assess loan affordability beforehand. A little planning goes a long way in ensuring you have a smooth borrowing experience. Being aware of the EMI commitment upfront provides peace of mind that you can repay your loan without hiccups.