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How Is Personal Loan Emi Calculated?

By Author: Neha Sharma
Total Articles: 243

A personal loan is an excellent type of loan option for borrowers. It is unsecured which means the borrower does not need to put forward any type of security to avail this loan. It is also unconditional, which means the lender does not put forward any type of conditions on the end use of funds. A personal loan can be used for a variety of purposes including:

• Medical emergencies
• Travel expenses
• Home improvement
• Business expansion
• Wedding expenses
• Higher education fees
• Pay off costlier debt

A personal loan is repaid in an installment each month from the date of disbursement of loan till the time the loan tenure ends. This installment consists of both principal repayment and interest payment. The installment amount remains fixed during the entire loan tenure and is also called equated monthly installment or EMI.

EMI can be calculated using the formula:

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

Where:

P= Principal or loan amount
R= Rate of Interest on loan
N=Tenure of loan in years

The tenure can be converted into months by multiplying it by 12. However, since the rate of interest is annual, it will have to be converted into a monthly rate of interest by dividing it by 12. The formula can be amended using monthly rates as follows:

P x R x [ (1+ R/12)^ (N*12)] / [ (1+ R/12) ^ (N*12)-1]

Where:

P= Principal or loan amount
R= Rate of Interest per month on loan
N=Tenure of loan in months

By entering the different inputs in this formula, it is possible to arrive at the monthly installment that needs to be paid. However, with the advancements in digital banking, it is no longer necessary to manually calculate the installment amount for a personal loan. It is possible to do that online for free using a personal loan EMI calculator.

What is a personal loan EMI calculator?

A personal loan EMI calculator is a simple tool that can be used to find out the monthly installment amount for a given set of loan terms i.e

• Principal amount
• Rate of interest
• Loan tenure

Once these three inputs are entered into the calculator, it automatically calculates the monthly installment amount. Some calculators give additional information like the total interest paid out on the loan over the entire loan duration whereas some give an exhaustive loan amortization schedule showing the breakup of principal repayment and interest payment.

A personal loan calculator also uses the same formula above to calculate the installment amount. However, being completely automated, the calculation is quick and instant, without the need to enter the formula every time you want to calculate the installment amount.

Using this calculator is extremely simple and most lenders have this calculator on their websites for potential loan borrowers to use. It is possible to enter different combinations of the principal, interest and tenure to find out the impact on the installment amount. This can help with loan planning and narrowing down the best lender for a personal loan. It is recommended to use this calculator before applying to different lenders since multiple personal loan applications can reduce your credit score.

A personal loan EMI calculator is a must use to help with financial planning.

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