A Beginner’s Guide to Understanding EMI Calculation for Personal Loan

ByRamesh Kumar
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With personal loans becoming a common solution for financial requirements in India, it is crucial to comprehend all facets of this financial instrument. 

One such aspect is the Equated Monthly Installment (EMI), which is pivotal in managing personal loan repayments and making a financial plan. 

This article serves as a detailed guide, unravelling the mysteries behind personal loan EMI calculation for personal loans.

EMI: Unravelling the Financial Tapestry

When you avail of a personal loan, you repay it through EMIs. 

But what exactly is an EMI?

  • An EMI, or Equated Monthly Instalment, is a fixed amount you pay the lender each month until you fully repay the loan.
  • An EMI comprises two components. One is the principal amount you borrowed. The other one is the interest accrued on that principal.
  • The concept of EMI provides a clear plan for loan repayment, enabling the borrower to manage their monthly budget effectively.

Suppose Ajay borrows Rs 1 lakh from a bank for a personal loan with an interest rate of 12% per annum and a tenure of 1 year. The EMI Ajay has to pay monthly will include a portion of the Rs 1 lakh and the 12% interest on it.

 

The Trinity of EMI Calculation: Principal, Interest Rate, and Tenure

The EMI for your loan only materialises out of thin air. Three main factors influence the EMI that you need to shell out each month:

  • Principal Amount: This is the actual amount you borrow. 
  • Interest Rate: Set by your lender, this rate applies to your principal amount. A higher interest rate increases the EMI.
  • Loan Tenure: Longer tenure results in lower EMI, but you pay more interest in the long run.

Pooja’s example is the best explanation for this kind of situation. Pooja is looking to calculate EMI for a personal loan. She borrows Rs 5 lakhs from a lender at a 10% interest rate for a tenure of 5 years. Her EMI will depend on this principal amount, the interest rate, and the loan tenure.

 

Why Online EMI Calculators Work

In today’s digital era, you don’t have to wrack your brains doing the math. 

Online EMI calculators are here to do the heavy lifting for you:

  • What are Online EMI Calculators?These digital tools automatically calculate your EMI when you input the principal, interest rate, and tenure.
  • How to Use Online EMI Calculators: Input the values of your principal, interest rate (annual), and tenure (in years). The tool instantly provides the EMI.
  • Advantages and Limitations: While online EMI calculators offer convenience and speed, they may not factor in changes in interest rates over the tenure, particularly in the case of variable-rate loans.

Let us consider Riya, who wants to know how to get loan with low CIBIL score. She also wants to know the impact of the likely higher interest rate on her EMI. If Riya uses an online EMI calculator, she would need to adjust the interest rate value to see how it affects her monthly installments.

 

Conclusion

Understanding how to calculate EMI for a personal loan is instrumental in making informed financial decisions. Grasping this concept enables you to plan your monthly budget effectively and maintain robust financial health. Knowing how to get a personal loan with a low CIBIL score can also be beneficial in managing and optimising your EMI.