Loan Calculator / EMI Calculator

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What is an EMI?

  • Equated Monthly Installment (EMI) is a monthly payable amount to a bank or a financial institute during the period of a loan.
  • It is a sum of principal amount and the interest over principal.
  • For fixed rate loan, the EMI amount is constant for the entire loan duration.
  • The first EMI has the highest interest component, this reduces gradually as the principal is paid off every month. Thus, the last EMI will have the least interest component while highest principal component.
  • Defaulting on payment of EMI can lead to an increase in EMI amount in subsequent month. Similarly, advance part-payment can reduce EMI amount. 

EMI calculation formula:

EMI is calculated based on principal amount, rate of interest and the total duration of loan.

E= P x r x {(1+ r)^t / [(1+r)^t – 1]}

Where,

E= EMI amount.

P= Principal amount.

r= Rate of Interest.

t= Tenure in months.

Let’s consider an example to understand this better,

You borrow a loan of 50000 for a period of 3 years (i.e. 3 x 12=36) at an annual interest rate of 7% (i.e. 7/12= 0.5834).

E= 50000 x 0.5834 {(1+0.5834)^36 / [(1+0.5834)^36 – 1]}

E= 1543.85

EMI amount in this case for 3 years will be 1543.85.

How is interest in EMI calculated?

Interest component is calculated on remaining principal amount for each month.

Let’s continue with above example where EMI is 1543.85 and principal amount for 1st month is 50000

Interest component = (balance principal amount x interest rate) / 12

Interest component = (50000 x 0.07)/12

Interest component = 291.67

Principal amount paid= EMI amount – Interest component

Principal amount paid= 1543.85 – 291.67

Principal amount paid= 1252.18

So interest components for 1st month is 291.67, while principal component is 1252.18

Remaining principal amount after 1st EMI is 48747.82 (50000-1252.18)

Similarly for 2nd month, interest will be calculated at remaining principal amount i.e. 48747.82.

Interest component= (48747.82 x 0.07)/12

Interest component= 284.36

Principal amount paid= 1543.85 – 284.36

Principal amount paid= 1259.49

So interest components for 2nd month is 284.36, while principal component is 1259.49.

Thus, interest component gradually reduces while principal component increases in an EMI with each passing month.

Types of loan:

Personal Loan:

Personal loans can be used for any personal expense. It does not have any specific purpose. These loans are versatile and can be used for any purpose like medical bills, car repair, vacation and much more.

Personal loans are insecure as nothing in value is pledged against the loan.

Personal loans are offered by various banks and financial institutes and even from online lenders.

Excellent credit score is not required to get personal loan approved.

Loan approval is quick as compared to other loans. Ideally other types of loans can take around a month to get approved, personal loans can get approved in a day or two.

Rates of Interest in personal loans are ideally higher.

The monthly payment of personal loans can be reduced by selecting longer payment, but interest rate increases.

Home Equity Loan:

Home loans are borrowed from financial institutions or a Bank to purchase a house.

Depending upon your financial score, interest rates may be lower.

The interest rates can be fixed or floating.

Home loan is a secured loan.

Buying a home is one of the biggest investments one makes in life. It rewards a sense of accomplishment.

In some countries, it helps in tax exemption.

Home Loan is a long term commitment.

Home Loan does not make you 100% owner of the house if you do not repay the loan amount.

Auto Loan:

An auto loan is borrowed to purchase a motor vehicle (car, bike, truck, etc.)

Collateral is not required as the vehicle will act as a security to the lender.

There are two types of auto loan. Direct (borrowed from financial institute) and indirect (arranged by car dealer)

It is great for credit history.

Student Loan:

Student loan is a financial assistance designed to help students pay school related fees.

Wide range of expenses are covered in student loans such as tuition fees, study material, travel expenses, etc.

It makes higher education more attainable for those that don’t have other funding options.

Student loans generally have lower interest rates.

This kind of loan does not require a good credit score.

Taking a student loan means starting your adult life with debt.

Business Loan:

Business loan is granted to an entrepreneur or aspiring entrepreneur  to expand or start the business.

It maintains control over your business. Unlike borrowing equity (where business is shared), taking a business loan from a bank / financial institute offers you complete control over your business. Banks / Financial institutes don’t get involved in your business. It means full control over your business management and company’s operation.

The interest rates are generally high.

It is difficult to qualify for a business loan.

Difference between secured and unsecured loan:

Secured loan:

A secured loan is connected to a piece of something valuable such as a house or car.

In secured loans the lender can take possession of the collateral in case of non-payment of the loan.  

Auto or House are the most common types of secured loan.

A secured loan has a low interest rate.

Secured loans offer higher borrowing limits.

 

Unsecured loan:

An unsecured loan is not protected by collateral or anything valuable.

Credit card, student loan, personal loan and bank overdrafts are the most common types of unsecured loan.

An unsecured loan has a higher interest rate.

An unsecured loan offers a lower borrowing limit.

These kinds of loans are generally a short term loan.

Unsecured loan can drive you deeply in debt as the rate of interest is quite high.