EMI Formula: How To Calculate EMI With Example

While you can easily choose and apply for different loans, prior knowledge of how much you need to borrow can help to avoid facing payment defaults. Since failing to pay EMIs on time can harm your financial record, it is imperative to find an instalment amount that suits your financial capabilities. 

In this regard, using an EMI calculator can be of great help. This type of online application will allow you to assess your monthly payment obligation that aligns with your ability to pay back the loan. 

What is the EMI Formula to calculate monthly EMIs? 

When applying for a loan from a financial institution, you must pay an EMI or Equated monthly instalment. However, estimating how much you can actually afford to repay per month can be a challenging process. 

The basic formula that works in calculating EMI is as follows:

E = P x R x (1+r)^n/((1+r)^N – 1, where 

E = Equated Monthly Instalment

‘P’ stands for principal amount

‘R’ denotes applicable rate of interest

‘N’ stands for the loan term or tenure

By using this formula, you can easily calculate the monthly instalment of your loan. However manual calculations are more prone to errors leading to a wrong decision. In such a case, an EMI calculator comes into play.

Formula for Online Emi Calculators

The mathematical formula mentioned above is considered and used by the entire financial industry for calculating the EMI for any loan amount. The online EMI calculator is adjustable; you can calculate the EMI payable by entering the values as per your preference. 

Online EMI calculators also work on the basis of this formula: 

EMI = [P x R x (1+R)^N]/[(1+R)^N-1]. 

So to get a comprehensive understanding of these variables, let's discuss them in detail:

• R represents ‘rate of interest’. It is the interest rate that a lending institution charges for a loan. This rate of interest may vary depending on the lender; higher the rate of interest, higher will be the EMI amount. 
• P denotes your principal amount. It is the loan amount that you borrow from a lender. The lower the amount you borrow, the lower will be the EMI and vice versa.
• N indicates the loan tenure. It is the time within which you must repay the loan amount. This loan amount is inversely proportional to the EMI. This signifies that the longer your loan tenure, the lower will be the EMI and vice versa.

These are the factors on which your EMI amount depends. You can alter these values in the EMI calculator as per your loan details or preference. 

EMI Calculation Formula with Example

After learning about each variable, let's get a clear idea of how this calculator works.

Suppose you have availed a loan of Rs 10 lakh to build a house. The lending institution has offered a loan with an annual interest rate of 7.2% for a tenure of 10 years. 

As per the formula, the monthly loan repayment amount will be:

P x R x (1+R)^N / [(1+R)^N-1] where,

N is 10 years or 120 months

R is 7.2% = 7.2/12/100 = 0.006

EMI = Rs 10,00,000 * 0.006 * (1 + 0.006)120 / ((1 + 0.006)120 – 1) = Rs 11,714.

Hence, you will be paying the EMI of Rs 11,714 every month for 10 years. Some lending institutions may show you the break up between the principal amount and interest rates to help you assess your EMI payments.

Factors affecting your monthly EMI amount

With the current market rates, tenure and other factors, both the number of EMIs and the amount can change. The principal factors that can have an impact on your loan amount, as well as EMI, are as follows:

• Fixed or floating rate of interest on loans

The kind of interest paid on the loan is an important factor in determining your monthly EMI amount. For instance, in case of a loan with a fixed rate of interest, EMI payments remain constant throughout the tenure. Whereas the interest rate on loans with floating rates fluctuates in accordance with market rates.

• Pre-closing or partial payments

It is another factor that affects your EMI payments. The principal amount of the loan gets reduced every time you make partial payments towards the loan. This leads to a reduction of the total interest that must be paid. 

In most cases, if you are making a partial payment, you will be given an option of keeping the tenure or the EMI amount the same. Your loan duration or tenure will decrease if the EMI is kept same. In a similar way, your monthly payment obligation will reduce if the tenure stays the same.

It is clear that all varying factors complicate the process of calculating your monthly EMI manually. In such a scenario, an online EMI calculator enables you to calculate the repayment amount seamlessly. Hence, you get to save a lot of time, resulting in a hassle-free and convenient experience. 

Final Word

Before applying for any loan, it is imperative to calculate your repayment amount to ensure that the EMI payments won’t strain your finances. This article has discussed the EMI calculator formula in detail, which can help you understand how the repayment amount is calculated. As a result, you can manage your finances most efficiently.

Frequently Asked Questions

1. Are EMI calculators accurate?

Yes, the automatically fed formula into the calculator’s system helps to compute EMIs of any loan within a few seconds. It reduces the errors associated with lengthy calculations. 

2. What are the advantages of using an EMI calculator?

You can use EMI calculators anytime, anywhere. Using an EMI calculator gives you the liberty to make various adjustments and also helps you to compare different loan principal amounts and their EMIs effortlessly.

3. What is an ideal EMI?

There is no such major thumb rule for an ideal EMI; it depends on your repayment or financial capacity. However, it is advisable not to exceed 40% of your salary. 

4. What are the different types of EMI calculators?

There are different types of EMI calculators. This includes a personal loan EMI calculator, car loan EMI calculator, home loan EMI calculator, education loan EMI calculator and Loan against Property EMI calculator. Therefore, you can use these calculators depending on your loan type.