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Emi Formula sheet
Answers
Answer:
Explanation:
It’s an EMI world. Whenever we talk about loans, the first thing that crosses the mind is loan EMI. The abbreviation, EMI stands for Equated Monthly Installment. An equated monthly installment (EMI calculation) is the sum that the loan borrower pays every month to repay the money borrowed on a particular date in each calendar month. The loan amount along with the accrued interest is divided equally over a period which is the loan tenure. The number of loan EMI's is equal to the number of months in the loan repayment tenure.
Formerly, limited range of products, say personal loans or home loans and alike loan products were available on EMI. But now the scenario has completely changed. E-commerce world has now so much to offer.
From household appliances to electronic gadgets, it’s all online. Apart from this radical change, one of the significant effects is on the affordability of products through EMI option. Merchants now offer reasonable installment amounts, which defers the lump sum paid and breaks it into a number of installments over a certain period.
Simple, isn’t it?
But do you know what does EMI means? What does it constitute? What if you want to calculate the EMI of your loan product?
Let us answer all these questions here and make it both sound and read simple for you.
What is EMI ?
Let us first understand the acronym “EMI” in simple terms. EMI stands for equated monthly installment. Equated means same in value, monthly means every month, and installment means the amount due.
Hence, an Equated Monthly Installment (EMI) means a certain amount to be paid by the borrower to the lender for the predetermined period on a monthly basis.
EMI depends on three components – loan amount, a tenure of loan and rate of interest. The number of loan EMi's you need to pay and the number of installments is inversely proportional to each other.
For example – Mr. X wants to purchase a mobile phone online worth Rs. 15000.00 wherein the EMI mentioned is Rs. 1400 per month. In case Mr. X purchases it on loan EMI, then he will be required to pay Rs. 1400 per month for approximately 11 months (Rs. 15000/ 1400 = 10.71 approx ~ 11 months). This is how EMI works in this case.
Basically, EMI is a contemporary version of the loan, wherein the pinch of lump sum payment is deferred and is broken down into parts to be paid over a period of time.
EMI Calculation Using Mathematical Formula
EMI = [P x R x (1+R)^N]/[(1+R)^ (N-1)],
In this formula the variables stand for:
EMI – the equated monthly installment
P – the principal or the amount that is borrowed as a loan
R – the rate of interest that is levied on the loan amount (the interest rate should be a monthly rate)
N – the tenure of repayment of the loan or the number of monthly installments that you will pay (tenure should be in months)
The same formula is used in an EMI calculator to provide you with the correct EMI payable within seconds.
Also Read: Investment is not a mere Tool for Tax Saving
Let us consider an example to understand the loan EMI calculation in a better way,
For example, you have taken a personal loan of Rs. 5 lakhs for 2 years at an interest of 20 % p.a.
The first thing that you need to do is, convert the annual interest rate into a monthly rate and the tenure into months.
To calculate the monthly interest rate, divide the annual interest rate by the number of months in a year, i.e. 12, so monthly interest rate is 20/12 = 1.66% per month
The 2-year loan tenure must also be converted into months (i.e.12X2=24 months) before integrating into the formula
We have three variables with us which we can integrate into the formula as follows:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
EMI= [5,00,000 x 1.66/100 x (1+1.66/100) ^ 24 / [(1+1.66/100) ^ 24 – 1)
EMI= Rs. 50, 895
The EMI calculation formula is universal and can be applied to different loans. The variation in EMI value depends on the three key variables, i.e. the loan amount, the interest rate and the loan tenure.
The EMI is directly proportional to the loan amount and interest rates. It implies that with increase in amount and interest rate, the EMI on the loan also increases. Whereas, the EMI is inversely proportional to the tenure of loan. It means that though the amount of paid interest increases with longer tenures, but the EMI payments decrease if the loan is repaid over a longer time period.
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