Equated Monthly Instalments, or EMIs, are closely associated with modern finance, especially loans such as Personal Loans. Concerning loans, it refers to the monthly payments due to a bank or financial institution to repay the loan amount borrowed. Generally, the EMI amount consists of two components: the amount due towards the principal and the interest payable.
How does EMI work for Personal Loan?
You can use a Personal Loan for various purposes, like paying fees, medical costs, financing events, etc. However, it is an unsecured loan, and lenders usually levy a higher interest rate due to the same reason. Thus, it becomes essential for you to calculate the EMI due to planning your finances accordingly. Paying off EMIs on time can impact your overall credit score and improve your ability to avail of another loan.
You can calculate Personal Loan EMI using the Flat-Rate method, which is as follows:
EMI = (Principal + Interest)/Period in Months.
Thus, you can apply the interest rate to the principal amount to determine the interest amount due over the entire tenure of the loan. Then add the principal amount with interest determined and divide that sum with the loan period in months.
You can also use the Reducing-Balance method, which is as follows:
EMI = [P x R x (1+R) ^ N]/[{(1+R) ^ N}-1]
Wherein P is the Principal Loan Amount, R is the monthly rate of interest, and N is the loan duration in months. This formula is used when the interest rate is applied on the remaining principal amount after a portion of the principal amount is repaid through EMIs. The EMI amount might be the same here, but the interest due reduces, and more of the amount goes toward the principal amount.
What are EMI Calculators?
Calculating EMI due on a Personal Loan by using mathematical formulas might be difficult and create errors. To get an accurate figure, it is better to rely on EMI Calculators. These calculators are online tools available for free.
Try out the EMI Calculator offered by HDFC Bank by clicking right here.
You simply have to provide pertinent details like the amount borrowed, the rate of interest, and the loan tenure. Specific platforms also offer an Amortisation schedule that breaks up your EMIs into the interest and principal components across the loan tenure.
How does an EMI Calculator help while opting for a Personal Loan?
Estimates the monthly cost of your loan: With the help of an EMI Calculator, you can get a comprehensive idea of the EMI amount due each month. It helps you understand the sum you need to set aside each month to pay off the loan amount on time. You can use it to manage your finances accordingly.
Helps to maintain a low debt-to-income ratio: A debt-to-income ratio compares your debt to your income. With an EMI Calculator, you can get an idea of the debt you owe and then compare it to the income in hand. It will help you manage future payments or plan for any adjustments needed to your finances.
Allows you to adjust loan amount or loan tenure: an EMI Calculator will give you an idea of the amounts due across the loan tenure. EMI is closely related to the amount borrowed and the tenure. Thus, if the EMI amount is difficult for you to manage, you can speak to your lender and adjust the tenure to handle the EMI payments effectively. You can use the EMI Calculator before applying for a loan to only avail of a loan amount you will be able to repay.
If you plan to apply for a Personal Loan or any other loan, understanding EMI is essential. It can help you apply for the correct kind of loan and borrow an amount you can repay. While EMIs can help you pay off loans easily, they also allow you to plan your finances.
Click here to learn more about the HDFC Bank Personal Loan!
Read more on how to calculate your Personal Loan EMI and eligibility here.
*Terms and conditions apply. Personal Loan at the sole discretion of HDFC Bank limited. Personal Loan disbursal is subject to documentation and verification as per Banks requirement. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.