Here is a concise article with a few examples to help readers to know how to calculate EMI (equated monthly installment) for a loan or personal loan.
EMI can be easily calculated using an excel sheet.
What is EMI
EMI is a fixed payment amount made
by a borrower to the lender at a specified date in each month.
In order to calculate details such as the total loan amount, percentage of interest and the duration of the loan in months are required.
In order to calculate details such as the total loan amount, percentage of interest and the duration of the loan in months are required.
How to Calculate EMI (Equated Monthly Installment) on Your Loan
I would like to present 2 scenarios to understand the EMI calculation in a better way along with detailed coverage on how reducing loan duration can help borrower to save money.EMI Calculation Scenario 1
Suppose, I am taking a short-term
loan of Rs.100,000 with an interest rate of 8% ("Flat rate") and the repayment duration for the loan
is 36 month.
Here is the step to calculate the EMI:
1. Open MS Excel click on any column, select ‘Formulas’ menu and Select ‘Insert Function” button (Depends on the version of MS Excel, this may change. I am using the Office 365 version)
2. In the box, select the PMT function from the list and click OK.
3. In the next box, provide the details: Rate = 0.08/12, Nper = 36, Pv = 100000, Fv = 0, Type = 0
Here is the step to calculate the EMI:
1. Open MS Excel click on any column, select ‘Formulas’ menu and Select ‘Insert Function” button (Depends on the version of MS Excel, this may change. I am using the Office 365 version)
2. In the box, select the PMT function from the list and click OK.
3. In the next box, provide the details: Rate = 0.08/12, Nper = 36, Pv = 100000, Fv = 0, Type = 0
('Rate' is the 8% interest rate, 'Nper' is the loan duration in months, 'Pv' is the loan amount. There is no fair value, so we are giving ‘zero’ for ‘fv’. We are again giving ‘zero’ for ‘type’ which indicating that the EMI will pay in each month without failure.)
4. Click OK to get the EMI amount of Rs. 3,133.64, which you required to pay in each month to bank for next 36 months against your Rs.1 lakh loan with 8% interest rate.
Now, multiply the received Rs.3,133.64 with 36 months. (3133.64 x 36 months), you will get a total of Rs.112,811.04. This is the amount you finally paying back to your bank at the end of 36 months against your Rs.1 lakh loan. It shows that, you are paying an excess amount of Rs.12,811.04 as the cost of this loan.
EMI Calculation Scenario 2
Suppose, I am taking a home loan
of Rs. 25 lakhs with an interest of 12.5% in diminishing rate and the
repayment duration is 400 months.
1. Open MS Excel click on any column, select ‘Formulas’ menu and Select ‘Insert Function” button (Depends on the version of MS Excel, this may change. I am using the Office 365 version)
2. In the box, select the PMT function from the list and click OK.
3. In the next box, provide the details: Rate = 0.125/12, Nper = 400, Pv = 2500000, Fv = 0, Type = 0
1. Open MS Excel click on any column, select ‘Formulas’ menu and Select ‘Insert Function” button (Depends on the version of MS Excel, this may change. I am using the Office 365 version)
2. In the box, select the PMT function from the list and click OK.
3. In the next box, provide the details: Rate = 0.125/12, Nper = 400, Pv = 2500000, Fv = 0, Type = 0
('Rate' is the 12% interest rate, 'Nper' is the loan duration in
months, 'Pv' is the loan amount. There is no fair value so we are giving
‘zero’ for ‘fv’. We are again giving ‘zero’ for ‘type’ which indicating
that the EMI will pay in each month without failure.)
4. You can now click OK button to get the EMI amount of Rs.26,460.85/-, which you required to pay in each month to the bank for next 400 months against your Rs.25 lakh loan with 12.5% interest rate.
4. You can now click OK button to get the EMI amount of Rs.26,460.85/-, which you required to pay in each month to the bank for next 400 months against your Rs.25 lakh loan with 12.5% interest rate.
Understand the Traps Behind EMI Calculations
This is not an end. I am really coming to the point of
revealing the secret of banks using to get huge profits.
Now you have an EMI of Rs.26,460.85 as per the EMI calculated with scenario 2. Multiply this EMI amount with total month of 400 (EMI Rs.26460.85 x 400 months). The result will be Rs.10,584,339.72/-.
This mean, you are paying an amount of Rs.105 lakhs against the Rs.25 lakhs loan!!!!
Now you have an EMI of Rs.26,460.85 as per the EMI calculated with scenario 2. Multiply this EMI amount with total month of 400 (EMI Rs.26460.85 x 400 months). The result will be Rs.10,584,339.72/-.
This mean, you are paying an amount of Rs.105 lakhs against the Rs.25 lakhs loan!!!!
How to Escape from EMI Traps?
Yes, there is. But it required some homework.
For an example, make a small change in the previous calculation in
Scenario 2. We are shortening the duration of repayment from 400 months to 240
months. Rest all are same (12.5% interest and Rs.25 lakhs loan amount).
Again, calculate using the above steps, but this time, give 240 instead of 400 months with ‘Nper’ column. Just Rs. 1,942.66 increase from the EMI with period of 400 months!
Again, calculate using the above steps, but this time, give 240 instead of 400 months with ‘Nper’ column. Just Rs. 1,942.66 increase from the EMI with period of 400 months!
How to Reduce Your Home Loan by Reducing Loan Repayment Duration
Here is the magic. We are now getting the EMI of Rs.28,403.51/-
for a repayment period of 400 months. Now multiply the Rs.28,403.51 with 240
(Rs.28,403.51 x 240 months). Will get a total of Rs.6,816,843.30.
It means, shortening the duration from 400 months to 240 months with little increase in EMI amount (less than Rs. 2,000), you are now saving a clear total of Rs.3767496.72/-
It means, shortening the duration from 400 months to 240 months with little increase in EMI amount (less than Rs. 2,000), you are now saving a clear total of Rs.3767496.72/-
Above said is applicable to Flat Rate Interest Loans.
A truth to learn from this is, when increasing the EMI and decreasing the Duration, interest rate also coming down to a great extent. Never agree the longer duration if banks are offering.
Negotiate with bank for the repayment period and make it maximum shorter to save more money.
A truth to learn from this is, when increasing the EMI and decreasing the Duration, interest rate also coming down to a great extent. Never agree the longer duration if banks are offering.
Negotiate with bank for the repayment period and make it maximum shorter to save more money.
Things You Need to Know Before Your First Loan Application
1. In case of interest rate increases, identify if you have any investments that getting less interest than your loan interest, stop that investment and repay the loan to reduce the duration and principal.2. Always select a bank, who does not impose any penalty for repaying loan with an amount more than the original EMI. This will help to repay the loan when enough cash in hand.
3. Always ask and get the payment schedule from the bank. This will help to understand the amount flows to the loan capital and interest components.
Conclusion
I have covered almost all about EMI in this article. What is EMI, How to calculate it, Real life scenarios, Multiple ways to calculate, The traps in EMI, How to Avoid the Traps, Tips before applying a loan etc...
As I am the fan of readers, it your time to share your thoughts as well as loan paying experience. Tell about the most pathetic situation you have faced during your loan payment and how overcome that?
As I am the fan of readers, it your time to share your thoughts as well as loan paying experience. Tell about the most pathetic situation you have faced during your loan payment and how overcome that?
