How is Your Personal Loan EMI Calculated?

Online personal loans are one of the most convenient products if you require some instant financial assistance. With immediate disbursements, a 100% digital process, and no collateral requirements, getting a personal loan has now become easier than it used to be.

Personal loans are usually cleared in the form of EMIs (Equated Monthly Installment), which is a fixed monthly payment divided equally throughout your chosen tenure. It’s imperative to have an understanding of your EMI payments before borrowing. This will help you choose the right tenure, and compare different lenders to pick a loan product that will be the best for you.

Before we learn how to calculate EMI for a personal loan, let’s first understand the factors that affect the EMI amount.

Principal: The EMIs are directly proportional to the principal amount, which is the amount that you’ll be borrowing. A higher principal will result in a higher EMI.

Rate of interest: This is the interest that you will be paying to the lender for borrowing. The EMI is directly proportional to the rate of interest, which means the greater the rate, the more the EMI.

Tenure: Tenure is the duration/period across which the loan is cleared. A long tenure means a lower monthly EMI amount, but more number of installments.

Now that we’ve taken care of the terminologies, let’s see how you calculate your personal loan EMI.

Fix your principal

This is the easiest and an important step, as it will directly affect the EMI amount you would have to pay. Remember to strike a balance between the down payment amount and principal, to make the most out of your personal loan. Also, do look for any offers or discounts you can avail to reduce the principal before opting for the loan.

Choose a loan provider

Different providers charge different interest rates. Therefore, carefully choosing a reliable provider with a comparatively lower rate of interest becomes a vital step in deciding your EMI amount. Be cautious of companies charging ultra-low rates of interest though, as there may be some caveats involved.

Decide your tenure

A longer tenure will reduce your EMI amount, however will increase the total installments you need to pay. In such cases, you end up paying more in terms of interest, even though the monthly payments are small. Carefully balance both the tenure and number of repayments.

The formula to calculate EMI for a personal loan

To calculate your EMI, put in the values of tenure, rate of interest, and principal in the following formula:

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

Where E is EMI, r is the rate of interest, n is the tenure or total duration, P is the principal amount.

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