Importance of Personal Loan Calculator to Calculate EMI in an Easy Way
Easy monthly instalment or EMI is the instalment the loan takers pay monthly. Easy monthly instalments include two different parts. The first part required in EMI is the personal finance amount divided by the repayment tenure. The second part of the EMI is the interest rate charged.
The borrowed finance amount is divided by the number of months given to repay the debt and the interest rate is added to it. The added amount of the divided monthly amount and the interest rate is the easy monthly instalment. An EMI is a comfortable way of lessening the burden of the customers who took personal finance from the financial institutions. A personal loan calculator helps figure out the EMI and the finance amount.
On the basis of the fixed rate, the easy monthly instalment is calculated. This means that during the whole repayment tenure, the rate of interest remains the same.
NOTE: If a customer can afford to prepay a part of a loan within the beginning months, it can be beneficial. This helps bring down the principal amount which affects the interest rates. The interest rates become lower in the coming months.
How can the Easy Monthly Instalment be Calculated Using Mathematical Formula?
Easy monthly instalment is calculated using the formula-
EMI = P * r * [(1 + r) ^ n / (1 + r) ^ n – 1]
The ‘P’ is the principal amount i.e, the finance amount,
‘r’ is the rate of interest
‘n’ is the repayment tenure
So, as long as a customer know the finance amount they would like to borrow, the rate of interest and the repayment tenure, a customer can calculate the Easy Monthly Instalment easily.
For example, if a customer is taking the financial help of AED 101000. The rate of interest is 6.5% and the repayment tenure is 48 months. A customer can calculate this as
EMI= 101,000 * 6.5 * [(1+6.5) ^ 48 / (1+6.5) ^ 48 – 1]
EMI= AED 2395
Which means the EMI is AED 2395. Therefore, the loan applicant will have to pay this amount every month for the next 48 months.
Note: In case of a missing Easy monthly instalment, the tenure of the repayment would increase. This missing payment will also reflect negatively on the credit score of the personal finance customer. Therefore, it is advised by the financial experts to borrow according to your financial situation.
How Can the EMI be Calculated Using Excel sheets?
Using Excel sheets to calculate EMI is one of the easiest ways to calculate EMI. The PMT is used as a function to calculate EMI in excel sheets. There are three factors involved in the calculation of the EMI. These factors are ‘nper’ (number of periods), ‘r’ (interest rate) and the ‘PV’ (present value of the loan).
The formula used in the Excel Sheet to calculate EMI is PMT i.e., EMI = PMT
EMI= Rate of interest, number of periods, the present value of the loan.
Note: The rate of interest used should be the monthly rate of interest. Also, the number of monthly EMIs is represented by the number of periods.
The result is shown in red or negative. The result indicates the borrower’s cash outflow.
Can EMI Change within the Repayment Tenure?
The Easy monthly instalment can change only in these scenarios-
- Prepaying the Finance amount- If a customer prepays a part of the finance amount, it brings down his interest rates too. This is a very effective method to bring down your interest rate. Prepaying a part of the finance amount lowers the principal amount to be paid back which impacts the interest rate. With the lower interest rate, a customer can pay a lesser amount every month. A customer can also opt to lessen the repayment tenure and pay back the loan much quicker
- Opt for a Floating Interest Rate- With the floating interest rate, the EMI is not stable. The EMI changes whenever the floating interest rate is changed by the financial institutions. A customer can ask for the change in repayment tenure if he doesn’t wish to change the EMI.
- Progressive EMIs- If a customer is struggling to pay the EMIs, he can choose the option of progressive EMIs. In this process, a customer pays a fixed lower EMI for a set period of time. When the set time is over, the customer needs to pay the higher EMIs. This process is often preferred by the millennials who don’t earn much at the beginning of their career.
Factors that affect EMI
There are three factors that affect Easy monthly instalment. These factors are the finance amount, rate of interest and the tenure for the repayment of the finance amount.
- Finance Amount- The finance amount is the money borrowed from a financial institution. This is one of the main factors which can affect the easy monthly instalment. With the increase or decrease in finance amount, the EMIs can go up and down too.
- Rate of Interest- Rate of interest is the percentage charged by the financial institutions for the finance amount. The rate of interest is determined by the financial institutions. Factors like credit history, repayment capacity, salary, etc. are taken into account to calculate the rate of interest.
- Repayment Tenure- This is the total number of months/ years given to the customer to pay back the finance amount. Customers often mistake an increase in repayment tenure to be profitable but that is not the case. Increase in repayment tenure means paying interest rates for more extra time.
EMIs are not difficult to calculate. As long as the customers know the factors involved, they can easily figure out the EMIs themselves. As stated above, EMIs are affected by different factors. EMIs or easy monthly instalments can be reduced or paid off early too. No doubt, the importance of personal loan calculator UAE is very important to figure out your EMI.