Choosing and applying for different loans is easy, but knowing how much to borrow can prevent payment defaults. The instalment amount should suit one’s financial capabilities since failing to pay EMIs on time can harm the credit record.
In this regard, using an EMI calculator can be of great help. Knowing EMI calculation can help assess the monthly payment obligation that aligns with one’s loan repayment ability. But what is an EMI, and how does it benefit the borrower?
Read on to know all about what is an EMI payment, what is an EMI formula, and how to calculate EMI.
What is the Meaning of an EMI?
- It is the monthly payment for the loan one has taken out. EMI is an acronym for equated monthly instalment.
- Principal and interest payments are made towards the overall loan amount as part of the monthly EMI payments.
- When the loan tenure reaches maturity, the contribution toward interest repayment reduces as the principal repayment portion increases.
- At the initial stage of the loan term, interest repayment constitutes the most significant portion of the EMI payment.
What is a Down Payment in EMI?
- The down payment on a house is the amount of the purchase price that a buyer pays in advance; the money does not come from a lender.
- Usually, the down payment amount is determined by the lending bank guidelines.
- However, some financial institutions may offer zero down payment for people with a high CIBIL.
How to Calculate Home Loan EMI?
EMI is calculated using two methods: Flat interest rate and Reduced interest rate.
Flat Interest Rate – EMI Calculation Formula
A flat-rate loan always charges interest on the whole amount regardless of how much the principal has already been repaid.
Suppose a person takes out a loan of ₹ 20 lakhs for 20 years with an interest rate of 12% to buy a home. The flat rate method means the person will always have to pay the interest on the ₹ 20 lakh loan amount.
Using the flat interest rate method, the EMI formula is:
EMI = (Principal + Interest)/Period (in Months)
So, in the example above, the calculation would be:
EMI = (2000000 + 480000)/240 = INR 10,333.33
Reducing Interest Rate – EMI Calculation Formula
After paying back a certain principal amount every month, the reducing EMI calculation method always charges interest on the loan’s outstanding balance. The EMIs remain the same in this case, but the interest component decreases each month.
Using the reducing interest rate method, the EMI formula is:
EMI = [P x R x (1+R)^N]/[{(1+R)^N}-1]
P = Principal Loan Amount,
R = monthly interest rate, and
N = Loan term in months.
Therefore, for the example above, the EMI calculation is:
EMI = [2000000 x 12/(100 * 12) x (1.01)^240] / [{{1.01)^240}-1]
= 20000 x 10.89 / 9.89
= 22022.244
How to Calculate Principal Amount from EMI?
EMI has two components:
- Principal – The amount of money borrowed and have to repay
- Interest – A fee charged by a bank for lending the money.
The formula to calculate the principal amount from home loan EMI is
P=(I*100)/(N*R)
P = principal amount
R = Rate of interest annually
N = period in years
I = Interest Amount
Assume a bank granted a ₹5 lakh home loan at 7.35% per year with a ten-year repayment term.
The simple interest amount in this example is ₹3,67,500/- (5 lakhs x 10 years x 7.35%). Over ten years, one must pay the bank ₹8,67,500/-, equal to the original loan amount plus interest.
The principal amount is calculated as follows:
P= (Interest amount*100)/ (Interest rate*number of years)
= (367500*100)/ (7.35*10)
=₹5,00,000/-
What Happens If EMI is Not Paid on Time?
One will suffer the following consequences by delaying EMI payments.
- A decrease in credit score is the most obvious impact. Missing even one instalment drops the score by 50 to 70 points.
- The lender can seize the property after following due process of law, if one defaults on a loan against the property despite regular warnings.
- Late fees or higher interest rates result from missed EMI payments. It is approximately 1% to 2% of the EMI.
Own a Luxurious Home in Mumbai
One must calculate the EMI interest amount before applying for a loan to ensure the EMI payments make them financially stable. This prudence becomes further essential while investing in luxury properties.
Piramal Realty is a leading home developer in India, offering luxurious residential flats in Mumbai and other cities. Here is an e-tour of Piramal Realty projects.
Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim /disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.
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