Personal loan EMI calculator: How it works and what impacts your EMI | Mint

Whenever a borrower takes a personal loan, the bank or the NBFC shares the EMI payment schedule. It has the details of the EMI amount, the number of EMIs, the EMI break up (principal and interest), etc. Have you ever thought about how the EMI is calculated? In this article, we will understand how the personal loan EMI is calculated and the factors that influence it.

What is a personal loan EMI?

The personal loan EMI (Equated Monthly Instalment) is the fixed amount that a borrower needs to pay every month to the bank or NBFC. The EMI has to be paid on a fixed date every month throughout the loan tenure. The bank usually asks the borrower to sign an auto-debit mandate. The mandate allows the bank to auto-debit the borrower’s bank account with the EMI amount every month on a specified date.

A personal loan EMI has two components: the principal you borrowed from the bank, and the interest the bank charges. Let us understand how the personal loan EMI schedule looks with an example.

Karan has taken a personal loan of Rs. 1 lakh at an interest rate of 12% p.a. for a tenure of 1 year. Karan’s EMI schedule will look as follows.

Karan will have to pay a monthly EMI of Rs. 8,884.88. The above table shows how, during the initial months, the interest component is higher, and the principal component is lower. As the EMI schedule progresses, the principal component goes on increasing, and the interest component goes on decreasing. Karan will pay a total interest of Rs. 6,618.55 over the one-year personal loan tenure.

How is the personal loan EMI calculated?

In the above example, we saw how Karan has to pay an EMI of Rs. 8,884.88 on his personal loan. The EMI amount is arrived at using the following formula.

P is the principal or loan amount, which in our example is 100000 (Karan has borrowed Rs. 1 lakh)

n is the loan tenure in months, which in our example is 12 (Karan has taken the loan for 12 months)

r is the monthly interest rate, which in our example is 0.01 (12% annual interest rate or 0.12 divided by 12 months = 0.01 monthly interest rate)

When you substitute the above values in the EMI formula, you will get the EMI amount of Rs. 8,884.88. However, you can get readymade calculators online. You can get them on banks, NBFC, or other personal finance websites/apps. Hence, you need not manually remember the above formula and calculate the EMI amount.

The other option is to calculate the EMI in an Excel spreadsheet using the PMT formula, which is as follows.

= PMT (rate, nper, pv, fv, type)

rate is the monthly interest rate, which in our example is 0.01 (Karan has taken the loan at 12% per annum or 0.12. When we divide 0.12 annual interest by 12, we get the monthly interest rate as 0.01)

nper is the loan tenure in months, which in our example is 12

pv is the principal loan amount, which in our example is 100000

fv is the future value, which in our example is 0

type is whether payment is timed at the end of the period (0) or at the beginning of the period (1), which in our case is 0

You need to enter the following formula in an Excel spreadsheet

You will get the EMI amount of Rs. 8,884.88

Factors that influence the EMI

In the earlier section, we understood how the personal loan EMI is calculated. Now, let us look at the factors that influence the EMI. Some of these factors are as follows.

1. Rate of interest

The bank decides the rate of interest on the loan. The higher the interest rate, the higher will be the EMI amount, and vice versa, other things being equal. In our example, the interest rate on Karan’s loan is 12% p.a. If the interest rate is higher than 12%, the EMI will be higher. If the interest rate is lower than 12%, the EMI will be lower.

2. Loan amount

The loan amount, also known as the principal, is the amount borrowed from the bank. The higher the loan amount, the higher will be the EMI amount, and vice versa, other things being equal. In our example, Karan’s personal loan amount is Rs. 1 lakh. If the loan amount is higher than Rs. 1 lakh, the EMI will be higher. If the loan amount is lower than Rs. 1 lakh, the EMI will be lower.

3. Loan tenure

The loan tenure is the number of years or months for which the personal loan has been taken. A higher tenure will result in a lower EMI, and vice versa. Choosing the loan tenure can be tricky. If the tenure chosen is longer than required, the borrower will end up paying more interest. If the tenure chosen is shorter than required, the higher EMI amount may pressure the cash flows and disturb the monthly budget.

4. Down payment

A down payment is the amount you pay upfront from your pocket for purchasing something. The remaining amount is financed with a loan. In a personal loan, there is no down payment. However, in loans like home loans, vehicle loans, etc., there is a down payment. The higher the down payment, the lower will be the loan amount; and thus, the lower will be the loan EMI.

How to get a personal loan at a lower interest rate?

You must compare personal loan interest rates across banks and NBFCs using an online aggregator. Shortlist 3-4 lenders with lower interest rates and take the discussion forward with them. Do you have a higher credit score? If yes, you can use it to negotiate with banks for a lower interest rate on personal loans.

Why should you have clarity on personal loan EMI calculation?

In this article, we have discussed what a personal loan EMI is, how it is calculated, and the factors that influence it. It can help you calculate the EMI before you take a personal loan. When you know the EMI in advance, you can check the monthly budget and evaluate how to make a provision for it. When you know the EMI before taking the personal loan, you can calculate the debt-to-income (DTI) ratio. If the DTI ratio is higher than required, you can work towards lowering it, to avoid loan rejection. Thus, much-needed clarity on the personal loan EMI calculation can help you manage your personal finances better.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.