Carefully Calculate Your EMI

By definition EMI refers to ‘A fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly installments are used to pay off both interest and principal each month, so that over a specified number of years, the loan is paid off in full.’

Most of the property purchases made are facilitated through bank loans. These bank loans are then repaid through monthly installments that cater to the principal amount along with a small interest. The EMI that you are required to pay against a loan amount depends on several factors – the loan amount, the loan tenure, and the (reducing) interest rate. Another factor that needs to be taken into account is the down-payment made at the time of purchase.

Ideally the EMI is calculated as per the following formula:

E = P. r. (1+r) ^n/ (1+r) ^n-1)

E= The EMI

P = The Principal loan amount

r = The rate of interest, calculated on a monthly basis. (E.g.: If the annual rate of interest is 10% then ‘r’ will be calculated as 10/12/100 = 0.00833)

n= The loan tenure or duration, considered in number of months

You can use this formula to correctly calculate the EMI for various loan amounts. However, always remember that a low EMI amount is preferable even if the loan tenure is higher, because when calculating EMI amounts it is advisable to keep both deflationary and inflationary scenarios in mind. Low EMI amounts are easy to manage even in low income scenarios.

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