What is EMI and how is it calculated.

What is EMI and how is it calculated?

EMI is the amount paid every month as long as the loan amount is outstanding, which goes towards both the interest & principal.

An Example

Let us take an example to understand how EMI works.

Assume that you have taken a home loan for Rs. 10 lakhs with the following details:

Loan amount: Rs. 1,000,000

Interest rate: 10%

Tenure: 10 years (120 months)

Based on these details, the EMI will be Rs. 13, 215.07

Suppose the EMI payment starts from 1st January, 2008. The payment schedule for the first year will be as follows:

Date	Principal	Interest	Period	Balance Principal
1-Jan-2008	4,881.74	8,333.33	1	995,118.26
1-Feb-2008	4,922.42	8,292.65	2	990,195.84
1-Mar-2008	4,963.44	8,251.63	3	985,232.40
1-Apr-2008	5,004.80	8,210.27	4	980,227.59
1-May-2008	5,046.51	8,168.56	5	975,181.08
1-Jun-2008	5,088.56	8,126.51	6	970,092.52
1-Jul-2008	5,130.97	8,084.10	7	964,961.55
1-Aug-2008	5,173.73	8,041.35	8	959,787.82
1-Sep-2008	5,216.84	7,998.23	9	954,570.98
1-Oct-2008	7,954.76	8,251.63	10	949,310.66
1-Nov-2008	5,304.15	7,910.92	11	944,006.51
1-Dec-2008	5,348.35	7,866.72	12	938,658.16

Even though the EMI is constant, the interest and principal portion are unequal. Initially the principal portion is less and interest is more. As the months pass, the principal portion increases and interest portion falls. The EMI will remain constant except in the following situations.

1. You pre-pay a part of loan, which will reduce the principal balance outstanding, thereby reducing the EMI.

2. You have taken a floating rate loan. So, if the interest rates change, so will your EMI.

3. You have customized your loan repayment in such a way that initially you pay lower EMI and a higher EMI at a later stage.

How is EMI Calculated?

EMI is calculated using the following formula:

Some Observations about EMI

1. EMI increases as the loan amount increases
2. EMI increases as the interest rates increase
3. EMI decreases as the loan period increases

Depending on your capacity you make a choice about the tenure for which you want to take loan. Even though you may get a lower EMI, it does not necessarily mean a good bargain as you will end up paying higher interest for the entire duration.

EMI calculation in Excel

You can also calculate EMI using the PMT function in excel. PMT function in Excel is described below:

Syntax

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

Rate is the interest rate for the loan.
Nper is the total number of payments for the loan.
Pv is the present value, or the total amount that a series of future payments is worth now; also known as the principal.
Fv is the future value, or a cash balance you want to attain after the last payment is made. If fv is omitted, it is assumed to be 0 (zero), that is, the future value of a loan is 0.
Type is the number 0 (zero) or 1 and indicates when payments are due. Set type equal to 0 (or omitted) if payments are due at the end of the period. Set type equal to 1 if payments are due at the beginning of the period.

EMI Calculator

Click here to view the EMI Calculator.

Author: Editor

Comments

Posted By: Editor	Date: 2/3/2009

We will soon be adding a calculator with complete EMI schedule as well as prepayment simulation.

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