Are you thinking about buying your dream home, but are you stressed about the EMI calculations? EMI, i.e. Equated Monthly Installment, is the monthly installment that you pay to the bank to repay the loan.
It’s calculated using a simple formula, but if you understand it step by step, you can calculate it yourself and plan your budget. Let us discuss in detail how EMI is calculated, with an example, so that everything becomes clear to you and you feel confident while taking the loan.
What is EMI?
EMI is the part of the loan that you pay to the bank every month in a fixed amount. It includes both the principal (the original loan amount) and the interest.
Initially, the interest component is higher, and gradually the principal component increases. Calculating the EMI helps you understand how much loan you can afford and how many years it will take to repay it.
Step By Step Calculation
The formula for calculating EMI is:
EMI = P × r × (1 + r)^n / ((1 + r)^n – 1)
Here, P is the principal, r is the monthly interest rate, and n is the number of months. Let’s look at it step by step:
- Note down the principal amount – this is the money you are taking as a loan, such as 50 lakhs.
- Convert the annual interest rate to a monthly rate – if the annual interest is 8.5%, then the monthly rate is 8.5 / 12 / 100 = 0.007083.
- Convert the tenure to months – if it’s 20 years, then 20 × 12 = 240 months.
- Now apply the formula – first calculate (1 + r)^n, then calculate the EMI.
If you want to do it manually, use a calculator, otherwise you can directly calculate it using online tools. You can try using sites like EMI calculators – this will help you in a natural way.
Example Calculation
Let’s say you are taking a loan of 50 lakhs, at an annual interest rate of 8.5%, for 20 years. The monthly rate is 0.007083, and the number of months is 240. Applying the formula, the EMI comes out to be ₹43,391. Initially, the interest is ₹35,417 and the principal is ₹7,974. As time passes, the interest decreases and the principal increases.
| Feature | Description |
|---|---|
| Principal Amount | Total loan amount (e.g., 50 lakhs) |
| Interest Rate | Annual interest rate (e.g., 8.5%) |
| Monthly Rate | Annual rate / 12 / 100 (e.g., 0.007083) |
| Tenure | In months (e.g., 240) |
| Formula Part | (1 + r)^n / ((1 + r)^n – 1) |
Pros and Cons
Pros
- Fixed EMI makes budget planning easier.
- The balance between interest and principal adjusts gradually.
- Online calculators allow for quick calculations.
- A longer tenure results in lower monthly installments.
Cons
- Initially, the interest is higher, and the principal is lower.
- EMI can increase if the interest rate rises.
- Manual calculation can be difficult without a tool.
- Incorrect calculations can disrupt your budget.
Conclusion
Calculating EMI is not as difficult as it seems – just understand the formula and follow the steps. This will help you in taking the right decision while taking a loan, so that you can easily fulfill your dream of owning a house. If you are taking a loan, first check your budget and calculate the EMI. Tell us in the comments how important EMI is to you!
