- July 11, 2020
- Posted by: Ganeshcbani
- Category: Blog
Calculating your Personal Loan Interest can be a difficult task, especially if you’re not familiar with the intricacies of interest rates and repayment schedules. In this article, we’ll show you how to calculate your Personal Loan Interest using a simple formula.
Personal Loan Interest Rate
Loans have today become an essential part of everybody’s lives and help us achieve important goals in life. Whether it is purchasing a car, buying a home or providing education to children abroad, loans have a crucial role to play in our lives.
Nevertheless, the most common word synonymous with loans is EMI. EMI, which constitutes an equal monthly payment, is the monthly sum paid to a loan on which we have opted. “EMI payments include both principal and interest contributions to the loan amount. In the initial stage, the interest component constitutes the main part of the EMI payment. When we pass down the loan term, the interest repayment portion is. and the principal repayment contribution is increased.
Schedule of Loan Amortization
The amortization schedule for the loan is a table showing the loan with the EMI payment. It shows the breakdown between the interest and the main component of a specific EMI payment. This timeline lets the borrower decide how the loan is paid and how much outstanding loans are paid. This includes details such as payment period, EMI, interest, principal and outstanding loans. If the borrower wants to predict the loan or wants to refinance his loan, the plan is very beneficial.
What are the causes of an EMI?
Three factors influence the EMI of a loan:
Loan sum – this refers to the total amount the person was borrowed. Interest rate – this is the rate at which the amount lent is paid. Loan term – this is the negotiated maturity period between the lender and the borrower.
How is EMI determined?
EMI is determined by mathematical formula: EMI = P × r × (1 + r)n/((1 + r)n – 1) where P = loan size, r= interest rate, n = tenure in month count.
For example, the EMI is shown in the following table for the principal amount for Rs 2 lakh, 10 percent interest rate and 12 month tenure:
Loan amount 2lakhs: Percentage of Interest : 10% EMI : 17583 Total Interest paid: 10996 for 2lakhs
Taking into account the aforementioned three variables, the EMI charges are directly proportional to loan amounts and interest rates, and inversely proportional to loan length. The higher the loan or interest rate, the greater the EMI payments and vice versa. If the duration of a loan rises with the increase in duration, the cumulative interest to be paid decreases with an increase in tenure.
Reasons for various EMI fees
The other significant deciding factor for EMI compensation is the interest rate on the loan. On fixed-rate loans, EMI charges stay constant throughout the duration of the period. On loans with floating rates, the interest rate varies according to the prevailing market rates. Therefore, EMI payments often vary as basic rates change.
The other factor impacting EMI payments is pre-closure or partial contributions to the loan. Any partial interest installments will be deducted from the principal sum of the interest. It leads to a reduction in the overall interest payable. “A person who makes a partial payment is usually given the option of holding the tenure constant or retaining the EMI constant. Unless the contract is extended, the annual EMI payments will be that. Likewise, if one wants to hold the EMI stable, the loan term is reduced
Which is EMI?
Equated Monthly Payment – short EMI – is the payment owed per month to the bank or some other financial institution before the balance of the loan is charged in its entirety. This consists of the interest on the loan and half of the amount to be reimbursed. The sum of the capital and interest is divided by the tenure, i.e. the number of months for which the loan must be repaid. This volume must be charged on a monthly basis. The interest factor of the EMI would be higher in the first few months and would be that with each payment slowly. The exact percentage assigned to the principal is dependent on the interest rate. However if the monthly EMI payment does not change, the proportion of principal and interest components will change over time. You pay more for the principal and less in interest with each successive charge.
How to use the EMI calculator?
Our EMI calculator is easy to use, intuitive to understand and quick to perform with colorful charts and instant results. This machine can be used to measure EMI for home loans, auto loans , personal loans, student loans or other fully repaying loans.
Enter in the EMI calculator the following information:
- Key amount of loan you want to use (rupees)
- Term of loan (months or years)
- Interest rate (percentage)
Use the slider for the EMI calculator form to adjust the values. When you need to enter more accurate values, you can type the values directly in the above boxes. When the values are adjusted using the slider (or when you click on the ‘tab’ key directly in the input fields, you will be re-calculated for the balance of your monthly payment (EMI).
There is also a pie chart showing the breakdown of the overall payment (i.e. total principal vs. total interest paid). This indicates the ratio of gross interest and principal amount in the number gross of all loan payments. The table showing the payments made each month / year for the entire period of the loan is shown along with a diagram showing the interest and principal components charged annually. A part of each charge is for the interest and the remainder is added to the main balance. A significant portion of each payment is committed to interest during the first loan period. Through time , greater amounts pay off the principal. The payment schedule also shows the interim balance for each year to be carried over to the next year.
Calculation of Floating Rate EMI
We suggest calculating a floating / variable
EMI rate by considering two opposing scenarios, namely optimistic (deflationary) and pessimistic (inflationary) scenarios. You manage loan and loan tenure, which are two components needed to determine the EMI; e.g., you must assess how much loan you have to buy and the duration of your loan tenure. Nevertheless, the rate of interest of banks and HFCs is dependent on RBI rates and policies. As a borrower, you can consider the two drastic incentives for an rise and lower interest rate and measure how high your EMI will be under these two conditions. This calculation will help you decide how much EMI is affordable, how much time you should hold your loan and how much you should borrow.
Optimistic (deflationary) scenario
Assume the interest rate is 1%-3% lower than the present rate. Take this condition into account and measure your EMI. In this scenario, your EMI decreases or you can choose to shorten the loan term. Ex: When you use home loans as an investment to purchase a property, an positive scenario would allow you to equate this with other investments.
Pessimistic (inflationary) scenario
assume that the interest rate is raised by 1% to 3%. Can you manage to pay the EMI without much effort? Even a 2% interest rate increase can lead to a substantial increase in your monthly payment for all loans.
Such a estimate lets you prepare for the future. You make a financial commitment for the next few months, years or decades if you take a loan. Find both the best and the worst scenarios be prepared for both. In short, aim for the best, but brace yourself for the worst!