Check If Your Personal Loan EMI is Calculated Correctly

How to Check If Your Personal Loan EMI is Calculated Correctly

22 Sept 2020
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Availing a personal loan is the easiest way to get financial support. Be it buying a car, buying a home or financing overseas education and fulfilling other such essential life goals a personal loan can help with all kinds of financing. Talking about loans, the most important word associated with it is EMI. EMI (Equated monthly instalment) is the monthly amount of payments that a borrower has to make towards the borrowed loan amount.

Equated monthly instalments comprise two components:

  • The principal amount repaid
  • The interest paid.

Loan Amortization Schedule

A loan amortization schedule shows the break up between the interest and principal component of a particular EMI loan payment. This schedule contains information like the time period of payment, EMI, interest, principal payment and the outstanding loan. In case the loan bearer wants to foreclose the loan or wants to refinance his loan, this schedule is beneficial in such cases.

Factors Affecting Personal Loan EMI

The personal loan EMI depends on three key factors:

1) Personal Loan Amount: The total amount that has been borrowed by an individual.

2) Personal Loan Interest rate: The rate of interest charged on the amount borrowed.

3) Personal Loan Tenure: The agreed-upon the loan repayment time-frame between the borrower and the lender.

How is EMI calculated?

There are two methods with which an EMI can be calculated. They are as follows:

1. Flat rate method:

Under this method, the interest rate is levied on the total loan amount regardless of the paid principal amount.

E.g. Ravi avails a loan of Rs. 1 Lakh at an interest rate of 8% p.a to be paid back in 3 years. As per this flat rate method, Ravi will pay the interest charged on the loan amount of Rs 1 Lakh.

The formula for flat rate method to calculate EMI:

EMI = (Principal + Interest)/Period in Months

Interest rate for ! year= 8/100 x 100000= 8000

Interest rate for 3 years n =8000x3=24000

EMI = (100000 + 2400)/36 = Rs 3444.44

2.Reducing Balance Interest Method

As per reducing EMI calculator, the interest is levied on the outstanding balance of the loan amount after repaying a certain amount of principal every month. The EMIs remain the same; however, the interest component in the EMI keeps reducing every month. When the personal loan amount of paid interest increases with longer terms, the loan EMI decreases if the loan is repaid over a more extended period.

Formula for reducing balance method:

EMI =

P x {[R x (1+R)^N] /[(1+R)^N-1]}

P = Principal Loan Amount = 100000

R = monthly rate of interest

If the rate of interest per annum is 8%, then the interest is (8/12)/100= 0.0067 per month

N = Monthly duration of the loan orthe number of instalments = 36

So, as per the reducing balance method the calculation would be:

EMI = 100000 x {[ 0.0067 x (1 + 0.0067)^36] / [(1+0.0067)^36-1]}= 3,135

If you go through both the methods, you will be able to understand that the EMIs calculated under the reducing balance method are generally lower than the flat rate interest method. The interest component in the reducing balance method would keep reducing every month, thereby saving on interest payments. The reducing balance method is the most commonly used method for calculating EMIs.

Calculating EMI Using Excel Spreadsheet

Use the MS-Excel formula “PMT” to calculate your loan EMI using an Excel sheet. The complete formula syntax for EMI calculation for Excel is:

PMT (rate, nper, pv)

Where,

rate = Personal loan interest rate (in percentage)

nper = Loan tenure in months, i.e. number of EMIs payable

pv = Loan principal (present value)

While the EMI calculation results will be the same whether you use the online EMI calculator or the Excel formula, the benefit of using the Excel formula is that you can use it offline as well.

Let us check the EMI for Ravi by using the PMT formula.

The rate used should be the monthly interest rate, that is, 8%/12= 0.0066

The number of periods represents the EMIs throughout the tenure.

=PMT(0.0066, 36, 100000)= 3,129.94

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