How Does an EMI calculator Work? - Formula for Calculating EMI

In today’s age and time, it is not difficult to satisfy the luxuries of the world. From purchasing a house, owning a car to funding education; everything is accessible due to loans. Many financial institutions offer loans at competitive interest rates that make provide an easy solution for people who are in need of finance.

Moreover, the government has come up with schemes like PMAY; wherein people who are in the Pradhan Mantri Awas Yojana list can avail a home loan at a subsidized rate.

The most significant element of any loan is the EMI or Equated Monthly Instalment. EMIs are a combination of principal loan amount and interest that needs to be paid every month until the loan is repaid completely along with the interest. It is essential to calculate the EMI before applying for a loan to understand how much EMI needs to be paid for a particular loan scheme and which is the most appropriate loan scheme.

EMI break-up

EMIs depends on three major factors: the loan amount, rate of interest, and tenure. It is inversely proportional to the tenure; and directly proportional to the principal amount and interest rate. This means that EMIs decrease with the decrease in the loan amount and interest rate. Longer tenures lower the EMIs but increase the total amount to be repaid. This can be illustrated as follows:

Principal loan amount? = EMI?

Interest rate? = EMI?

Tenure? = EMI?

The initial years of EMI repayment go towards paying the interest of the loan. As the loan matures, most of the repayment amount goes towards paying the principal loan amount. The outstanding amount on the loan reduces with time.

EMI calculationFormula The formula to calculate the EMI takes the principal amount, interest rate, and tenure into consideration as they are the main factors affecting EMI. The universal formula to calculate the EMI is as follows:

EMI= {(P*i) * (1+i) ^ N} / {(1+i) ^ N - 1}

Where, P: principal loan amount;N: number of installments; i: monthly interest rate charged by the lender.

ExampleHere is an example of EMI calculation using this formula:A customer has availed a loan of?1,00,000 from a lender. The loan needs to be repaid in 12 months and is charged at an interest of 12%.

P: 1,00,000;N: 12;i: 12/12*100 = 0.01 (to convert rate from monthly to yearly).

EMI can be calculated by substituting these values into the formula as follows:EMI= {(100000*0.01) (1+0.01) ^ 12} / {(1+0.01) ^ 12 - 1}EMI=?8,885

Thus, the customer has to pay an EMI of?8,885 on the loan.

EMI CalculatorOne cannot get an ideal EMI from the first calculation itself. The values need to be adjusted till a desired EMI and loan scheme is achieved. It is extremely tedious to keep calculating the EMI for different values. There might be times when the desired result is not achieved even after spending hours calculating and creating amortization tables with various values. An easy solution to this problem is an online EMI Calculator. EMI calculators are developed to take in values of different parameters and display results within a second. It can be used to calculate the EMI for all the loans; be it a home, car or personal loan.

Working of an EMI calculator Customers need to merely input the values of the loan amount, interest rate and tenure that for which they wish to calculate the EMI for against the spaces allotted for each parameter. The calculator then takes in these values; and displays the EMI using the in-built formulas and algorithm. The entire procedure doesn’t even take a second. The calculator not only displays the EMI, but also the total interest payable by the end of loan tenure and total of payments (principal plus the interest). A pie chart of EMI breakup will also be displayed along with an amortization graph for the particular set of values.

Benefits of using an EMI calculatorThe values can be adjusted as many times as one wishes to. There is no limitation on the number of times users can use it. It is free of cost and is time-saving. Customers can access calculations that could take hours in a few minutes. While human calculations are prone to errors, this calculator is accurate and convenient to use. The UI is user-friendly and devoid of any mathematical jargons. It is free of cost and requires only three inputs.

Loans are financial commitments that can go horrendously wrong if not approached correctly or paid enough attention to. Calculating the EMI is the best way to get an insight into how much one needs to set aside for the commitment until the end of the tenure. Therefore, customers need to make the best use of the EMI calculator to select the best loan scheme.

Hi, I am Anoop Bansal, a professional Chartered Accountant based in the National Capital - Delhi. I have worked for the top-notch Indian and International banking firms for the past 10 years. Currently, I work as a writer and financial consultant.