How Your Loan EMI Is Calculated, Understand This Simple Formula Before Borrowing

Mumbai: At different times in life, people need loans for things like buying a house, car, or funding education. Before taking any loan, it’s important to understand how EMI (Equated Monthly Installment) works.

Your EMI depends on three things:

- The total loan amount

- The interest rate

The loan tenure (time period)

A longer loan tenure gives you lower EMI, but you end up paying more interest in the long run. A shorter tenure means higher EMI, but less total interest. So, if you want to save on interest, it’s better to go for a shorter loan term.

What Is the Formula to Calculate EMI?

Banks and financial institutions use a simple formula to calculate EMI:

EMI = P × R × (1+R)^N / [(1+R)^N – 1]

Where:

P = Principal amount (loan amount)

R = Monthly interest rate (annual interest rate ÷ 12)

N = Loan tenure in months

For example, if you take a loan of Rs 10 lakh for 10 years at 7.2 percent annual interest, your EMI will be around Rs 11,714 per month.

You can also use online EMI calculators to do this quickly and plan your loan based on your monthly budget.

How Long-Term Loans Reduce Initial Burden

Long-term loans come with smaller monthly payments. So, they reduce the initial financial pressure. However, over time, the total interest you pay becomes higher.

On the other hand, short-term loans have higher monthly payments, but you pay less interest overall.

So, if your income allows, choosing a shorter tenure loan is usually a smart decision to avoid paying too much extra in interest.

What If You Already Have a Long-Term Loan?

If you've already taken a long-term loan and feel like the interest is too high, you can consider loan restructuring.

Loan restructuring means changing the loan tenure or EMI amount. This can help manage monthly payments better. But be careful - if you reduce the tenure, your EMI will go up.

Before restructuring, check all the terms and conditions of your bank. Also, EMI and interest rates depend on various factors like:

- Your credit score

- Loan amount

- Loan duration

So, it's always better to do a full check before making any changes.

Disclaimer: This article is for general information purposes only. Always consult with a financial advisor or your bank before making any loan-related decisions.