Wednesday, 15 February 2017

How to Use Online EMI Calculator Effectively

Most personal loans and home loans offered by lenders today are based on the EMI structure. You can compare these loans easily online, by using the loan EMI calculator. However, before you do that it helps to know a few things about EMI loans.
What is an EMI?
EMI is an abbreviation for Equated Monthly Instalment. When you get a loan, you repay it in smaller amounts on a monthly basis, which are called EMIs. Generally, an EMI includes both the principal, and the interest, and stays the same through the period of the loan. However, in some cases the EMI may change during the tenure. There are three possible scenarios that can make it happen. These are:
Case #1: Floating Interest
If the interest applied on your loan is fixed interest then the EMI stays the same throughout the tenure. However, if it is floating interest, then the EMIs might change, if the lender changes its policy regarding the interest rate in future.
Case#2: Progressive EMIs
If you have opted for a loan that comes with progressive EMIs then your initial payments will be smaller, which will gradually increase until the completion tenure. These kinds of loans are best suited to those who have just started their career, and can afford to pay higher EMIs as their income increased over time.  
Case#3: Prepayment
Say, you got a promotion at work, or receive a large heritage recently. You can use the money for prepayment of your loan, in which case the EMIs will become smaller. This is because the new EMIs will be based on the remaining debt(reduced after the payment). However, you might have to pay a certain fee for this option.
How to Calculate Your EMI
EMI calculation is based on one simple formula which is:
[P x R x (1+R)^N]/[(1+R)^N-1]
Here P is the loan amount or the Principal, R is the rate of interest per month, and N the number of instalments.
To understand the formula better, consider the following example:
Let the loan amount be Rs. 6,00,000, rate of interest be 10%, and tenure duration be 10 years (or 120 months). Comparing with the formula we have:
P= 6,00,000, R= 10/(12X100)= 0.0083, and N= 120
So, EMI = [6,00,000 X 0.0083 X(1+0.0083)120]/[(1+0.0083)120-1]
 EMI= [6,00,000 X 0.0083 X 2.696] / [2.674]
EMI=  Rs. 5020.97
Advantages of EMI Loans
All kinds of loans can be broadly divided into two categories- EMI loans and term loans. The latter comes with a fixed maturity date, and interest rate unlike the former, in which these values can change.
There are many advantages of EMI loans, some of which are as follows:
1. Flexibility- Most EMI loans grant a lot of flexibility. You can choose to prepay, or enjoy a lower interest rate if your loan comes with floating interest rate.
2. Affordability- For many people an EMI loan is the only way to afford a house or a car. If you have a good credit score, and your credit report shows timely payments and responsible credit usage, then you can easily get an EMI loan.
3. Manageable Pressure- You can settle for a convenient EMI loan repayment structure that you can manage. You have to pay affordable EMI payments every month, which won't affect your budget, and add minimum financial pressure.
Using EMI Calculators
Thanks to Internet you can easily compare EMI loans online easily. EMI calculators make it really simple to calculate EMIs of a certain loan. To calculate the EMIs all you need to know is the principal amount, rate of interest, and the duration of the loan. You can enter these values in whichever calculator you are using and you will get the results almost immediately.
You can make the most of EMI calculators by doing the following:
·         Make sure you have a list of all good loan options that you want to compare before you start calculating the EMIs.
·         Record not just the EMIs but also other factors such as interest and tenure duration.
·         Use a spreadsheet for recording all the values for easy comparison.

EMI calculators save a lot of time that you would otherwise have to spend by calculating EMIs using a standard calculator. Thus, use an EMI calculator to choose the best loan easily.

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