# What is EMI and How is it Calculated for Loans?

By Finserv MARKETS - Jan 31,2019
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Most people apply for loans to meet financial goals and commitments. Whether you wish to buy a car, send your children abroad for higher studies, purchase the home of your dreams or wish to go on that much-needed vacation, there are several reasons as to why you may apply for a loan.

When you think about a loan, the first thing that comes to mind is the equated monthly installments or more commonly known as EMI. This is the amount you need to pay each month towards the loan repayment. But, do we understand the various aspects of an EMI in order for us to make an informed decision?

## What is Personal Loan EMI?

An EMI is nothing but the monthly repayment of your loan and is essentially made up of two parts: the interest and the principal. During the initial years of your loan repayment tenure, the interest component of the EMI will be higher than the principal and the situation gradually reverses over time as you near your closure date.

## The amortization schedule

The amortization schedule is a tabular representation of the EMI payments. The table shows the amount that will be paid towards interest and principal in each month during the entire loan duration. The amortization table helps you understand the loan repayment schedule and the balance outstanding at the end of each month. This table is highly beneficial especially, if you wish to prepay the outstanding balance before the end of the loan tenure.

## Factors that affect the EMI

The EMI is calculated primarily on the basis of three factors. These are:

• Borrowed amount
• Rate of interest
• Loan tenure

## How to calculate Personal Loan EMI

The formula used to calculate the EMI is as follows:

EMI = Borrowed Amount or Principal x Rate of Interest x (1+ Rate of Interest) Loan Tenure/((1+ Rate of Interest) Loan Tenure -1))

Your EMI is directly proportional to the amount you borrow and the rate of interest. Therefore, your EMI will be higher if the borrowed amount or the rate of interest is high and vice versa. When you opt for a longer duration, the total interest paid on the principal during the entire loan duration is higher because the EMI decreases when the loan tenure increases.

## Type of interest rate

Another factor that affects the EMI amount is the type of interest rate. When you apply for a personal loan, you may opt for either a fixed or a floating rate of interest. If you choose the former type of interest rate, the EMI remains constant during the entire duration of the loan tenure. However, if you choose a floating rate of interest, the EMI changes based on the fluctuations in market rates. Check out Bajaj Finance Personal Loan Interest Rate.

## What is a Fixed Interest Rate?

A fixed interest rate is a fixed rate charged on a liability. A loan with a fixed interest rate provides payment stability. Among the most common fixed-rate products are fixed-rate mortgages and personal loans. It might apply during the entire term of the loan or just for part of the term, but it remains the same throughout a set period. The fixed-rate mortgage is quite popular because it gives the borrower a predictable monthly payment, usually till the end of the loan tenure. The capital value of a fixed-rate loan is generally determined as a function of the future rate of interest at the time of calculation. This means that they contain a capital risk, in that if interest rates go down, the capital value of the loan rises, and vice versa.

## What is Floating Interest Rate?

A floating interest rate is an interest rate that keeps fluctuating with the rest of the market or along with an index. It can also be referred to as a variable interest rate because it can differ over the duration of the loan term. This contrasts with a fixed interest rate, in which the interest rate of a debt obligation remains the same for the duration of the loan’s term. With a floating interest rate, you can obtain residential mortgages which are static and cannot change for the duration of the mortgage agreement, or with a floating or adjustable interest rate. Another advantage of floating interest rates is that it may float down, thus lowering your monthly payments.

With Bajaj Finserv Personal Loan you can avail floating interest rates that are usually lower than the fixed rates they offer to their customers. That means even when there is an increase in the floating interest rate, it can still be lower than the earlier fixed interest rates the bank had offered.

Another factor that affects the EMI on your personal loan is if you prepay the outstanding or make partial payments. Any partial payment(s) is used towards decreasing the outstanding principal amount, which reduces your interest payout. You may either reduce the EMI or decrease the loan tenure when you make partial repayments. However, it is advisable that you review the terms of and conditions thoroughly as some lenders might include an additional fee / charge towards prepayment or foreclosure. You can also avail nil charges for loan pre-payment or foreclosure option offered by Finserv MARKETS.

Apply for a Personal Loan at Finserv MARKETS, today!

Read more about how to get a personal loan with low CIBIL score.

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