Have a property in mind and have planned to opt for a home loan for the same?
As spoken in our previous blog, Equated Monthly Installment is more about Evaluation, Management and Implementation of the research you carry out before opting for a home loan. Post the research having a complete understanding about the calculation of EMI is important. To begin with, let us understand what EMI stands for.
EMI or Equated Monthly Installment is described by the Investopedia as “ a fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly installments are used to pay off both the interest and the principal each month, so that over a specified number of years, the loan is paid off in full.”
Surely, this definition is self explanatory, however, we shall have an in depth understanding about EMI with the help of an example in the latter part of the blog.
From the definition we can arrive at an understanding that when a borrower borrows money, he is entitled to make a certain fixed amount of payment to the lender periodically for several years so as to complete he loan repayment. This loan repayment can differ from one payment scheme to another, depending on the comfort of the borrower to repay the loan over a certain period of time which may be short or long term.
One of the main benefits of paying EMI for the borrower is that he is well informed about the amount he needs to pay to the lender every month, making his budgeting process easier.
The formula for EMI (in arrears) is:
or, equivalently,
Where:
• P is the principal amount borrowed,
• A is the periodic amortization payment,
• r is the periodic interest rate divided by 100 (annual interest rate also divided by 12 in case of monthly installments), and
• n is the total number of payments (for a 30-year loan with monthly payments n = 30 × 12 = 360).
Consider an example, a person takes a loan of 20,00,000 units of currency from the bank at 10.5% annual interest of 10 years (120 months), then the EMI can be calculated equating the mentioned details in the equation stated above in the following way:
EMI =
Units of currency 20,00,000 * 0.00875 * (1 + 0.00875)^120 / ((1 + 0.00875)^120 – 1)= Units of currency 26,987.00
Hence, the person will be paying 26,987.00 units of currency for 120 months to completely repay the loan taken from the bank. The total amount that he would be paying will sum up to 26,987*120= 32,38,440.00 units of currency. This includes 12,38,440 units of currency as the interest paid towards the loan.
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