How do you calculate your EMI? (Part 1)

In most of the cases, people who opt for either home loan or car loan use pre-available web-based EMI calculators or spreadsheets to calculate the exact EMI per month to be paid to the lender. In this article, you will learn the basics of EMI and how to calculate EMI using simple secondary school mathematics.

Please consider that this is a multi part series and this is the first article of the series.

Let’s start with the basics.

What is EMI?

EMI is an acronym for ‘Equated Monthly Installment’. EMI is the total amount paid every month towards the repayment of the loan for a specified pre-agreed tenure and rate of interest. EMI is compose of two parts. The principle amount and the interest on the principle amount. During the initial months of the loan repayment, the major portion of the EMI would be the interest for the loan amount. Towards the end of the tenure, the principle amount in the EMI would be significantly higher than the interest amount.


How to calculate the EMI?

The well known formula for calculating EMI is:

Formula for EMI calculation

In technical terms:

Short form of the EMI calculation formula

where,

  • P = Principle – Total amount borrowed from the lender.
  • R = Rate of interest per annum divided by 100 and the result divided again by 12.
  • n = Total loan tenure in months.

Example:

Let us consider that a Bank has loaned John an amount of 100000. John has agreed to pay an interest of 10% over a period of 3 years.

Let us calculate the EMI John has to pay every month for 3 years.

Available information:

Principle

:

100000
Rate of Interest

:

10%
Total loan tenure

:

3 years

Based on the above information, the rate of interest to be paid per month is calculated as:

Rate of Interest / 100 / 12 months = 10 / 100 / 12 = 0.00834.

The total tenure in months is 3 years x 12 months per year = 36 months.

We have,

  • P = 100000
  • R = 0.00834
  • n = 36

Let us substitute these values in the formula:

The EMI 3227 comprises of both interest component and the principle component.


References:

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