Personal loan is a very viable option for someone looking for quick financial assistance. Personal loans can be borrowed to meet a range of short term expenses such as vacations, personal expenses and even marriages. The reason for such wide appeal for personal loans is the low interest rates offered by such loans.
Personal loans are given in lump-sum payments and repaid over time in equal monthly instalments called EMI (Equated monthly instalments). Before opting for a personal loan, it is crucial for you to know the monthly instalments you would have to pay in the future. It aids you in planning and helps you prepare you against future expenses.
There are various factors that determines your personal loan EMI:
Principal payment: As the name suggests, principal amount stands for the amount that you have borrowed. Higher the principal, higher would be the EMI.
Loan interest rate: Interest rate can also significantly affect your EMI payments. It is directly proportional to the EMI
Time period of loan: The installments are equally divided throughout your loan tenure. Loan tenure shares an inverse relationship with the EMI. Therefore, a long tenure implies that your EMI would be lower.
Now that we know all the factors that could determine your EMI, let us now discuss how can you calculate your EMI:
Fix your principal:
Before choosing your bank, look for discounts or offers to reduce the principal as much as you can. As already discussed before, the principal amount directly affects your EMI. You need to strike a balance between down payment and principal to reach a reduced principal. This is a crucial step towards EMI payment.
Choosing your loan provider:
This is again quite significant as your lender would fix the interest rate on your loan. Interest rates on personal loans can vary from bank to bank. It is important to choose a lender with whom you share a trusted relationship as this affects your EMI payment. As interest rate is directly proportional to EMI, you want to choose a lender that provides you with a lower interest rate on your loan.
Decide your tenure:
Tenure is the time period in which your loan amount is cleared. There has to be a balance between number of installments and tenure. Since longer tenure would unnecessarily increase the amount of interest paid and lower time period would increase the monthly installments, you want to find a lender which provides you with a perfect match between tenure and monthly installments.
Mathematically, to calculate the EMI:
E= p*r*(1+r) ^n/(1+r) ^n-1
Here,
E= Equal monthly installments
R= rate of interest on loan
N= tenure
P= principal amount
If you find this equation Problematic don’t worry there are many banks which provide their own EMI calculators. You can just type in the figures to get to your EMI amount.
Conclusion
Bad financial situations can lead you to make rash decisions in borrowing loans without researching the EMI before applying. Before signing with any bank, check for all the factors affecting your loan instalments such as the principal, tenure and Personal Loan Interest Rate to reach an informed decision.