Equated Monthly Instalments (EMIs) are monthly payments that are made to repay a loan. This is a convenient way for someone to pay off their debt without worrying too much about the total size of the loan amount. It also gives an applicant a lot of flexibility in terms of how they wish to go about paying off their debt.
A question that applicants often wonder is how EMIs are calculated. The EMI amount depends on three factors. They are:
- Principal Amount: This is the actual loan amount. The interest and other payments are calculated based on this amount.
- Rate of Interest: This is the rate at which a bank charges interest. Interest, of course, is the amount that is charged by the bank. It is the profit that a bank earns on a loan. The rate of interest is presented as a percentage and is applied on the total loan amount to arrive at the total interest. Another point that must be noted is the type of interest rate that is being offered. Interest rates may be fixed or floating. In the case of a fixed rate of interest, the EMI amount will remain the same. But on a floating rate, the EMI amount will fluctuate. There are forms of floating interest where the EMI is kept fixed, but these ‘floating’ rates are predetermined and not true floating rates which fluctuate based on market conditions.
- Duration: This is the total time for which the loan is being availed. It is also called the tenure or loan repayment period. The longer the duration, the more the number of EMIs that an individual would have to pay. However, longer tenures also mean a lower EMI amount.
In case loans where part prepayments are allowed, the EMIs will be affected. With part prepayments, the total loan amount will decrease and hence, the amount of interest charged on the remaining loan amount goes down. This will work to the benefit of the applicant, as long as the prepayment charges are not too high.
Calculating the EMI yourself used to be a real pain. Fortunately, these days, there are many tools available online that give people the option of calculating their own EMIs at the click of a button. Most banks today provide this facility on their websites, as do many online financial aggregators. An individual needs to do is visit the bank’s official website and search for the EMI calculator tool. There, they can fill out the principal loan amount and the duration for which they require the loan. The rest of the information such as interest rate and processing fee would already have been filled out by the bank. Now, all they need to do is press the calculate button and within seconds, the EMI amount is in front of them. If you use an EMI calculator on a financial aggregator, you may have to put the rate of interest in yourself or if you are calculating the EMI for a particular product or bank, it will be automatically filled in. These websites that offer financial services may also allow you to compare the EMIs of different products and banks.
The EMI calculator tool is been provided with the intent of making banking seamless and feasible for customers. You can easily calculate EMIs for car loans, for instance. Now, the customer feels like a part of the system as they now know how the EMI amount is calculated. It empowers the applicant and gives them a clear picture about how they should go about paying off their debt.
The various benefits of a car loan EMI calculator have been briefly listed here.
- Saves Time: EMI calculators save time as a loan applicant does not have to visit a bank in order to ascertain their EMI amount.
- Transparency: The process of loan payment and interest calculation is made more transparent. The applicant is in the loop when it comes to calculating the EMI amount. There is no more guesswork or fear that they are being swindled.
- Planning: Once an applicant knows the amount they have to pay, they can plan their monthly budget accordingly. Further, they can know ahead of time if they will be able to afford the EMI. If it is too high, they can avoid applying altogether.
- Comparison: The EMI calculator can be used to compare the car loans from different banks with varying rates of interest. This can help the applicant decide which bank or type of loan is the best for them. The applicant can go over all the available options and would be in a position to make a wise decision.