How to calculate housing and car loan EMI?

Wednesday, December 6, 2017

Loan refers to the easy disbursal of money by the bank to those who are in dire need of money. It allows individuals to easily cope with sudden financial emergencies, debts, and other liabilities. There are different categories of loan for different purposes like housing loan for buying/refurbishing/renovating home, personal loan for medical emergencies, marriage, and for other big-ticket expenses, car loan to buy a new/used vehicle and the list continues.

Before applying for any loan from banks or financial institutions, it is better to do a thorough research regarding the interest rates offered by different lenders along with other terms and conditions. Interest rate happens to be the most important point to consider as it will decide the amount of EMIs that you will have to pay every month.

To get a fair idea about what could make a viable interest rate on home loan, you can calculate the EMIs that you would have to pay with different interest rates. This will make it easier for you to compare various loan offerings and at the same time help you choose the right tenure for your home loan or car loan.

What is EMI?
EMI refers to Equated Monthly Instalments. It is the amount that you will have to pay every month to pay off the loan. EMI consists of both principal repayment and the interest charged on the loan by the lender. Usually, the interest component is higher during the initial years of loan repayment and, as you move forward, the percentage of principal repayment in your EMIs increases.

How to calculate housing and car loan EMIs
To calculate the Equated Monthly Instalment (EMI) on housing loan and car loan, one can either choose the manual way or calculate it on an Excel sheet. One can also calculate the EMIs online by using EMI calculator available on several banks’ websites and other third-party websites. 

Manual Calculation
To calculate the EMI manually, use the formula given below:-

EMI = [P x R x (1+R) ^N]/ [(1+R) ^N-1], where 

P is the principal loan amount

R is the loan interest rate per annum (so if the interest rate charged by the bank is 11%, it will be calculated as 11/ (12 * 100).

And, N is the number of monthly instalments.

Those who are good with calculations can find out their home loan and car loan EMIs using the above formula. However, a lot of other people might find this to be a really complex method of EMI calculation.

Using Excel Sheet
Another way to calculate home loan and car loan EMIs is through Microsoft Excel. The formula to calculate EMI using excel sheet is PMT. You will need three variables to initiate the process of EMI calculation through excel sheet-- number of period (nper), value of loan also known as present value (pv) and the rate of interest (rate). Please note that the rate used here should be in monthly terms. This means if the per annum interest rate is 10%, it should be divided by 12, 10/12= 0.834

So, when you put it in the formula- PMT- you get,

PMT (pv, nper, rate)

The result will be shown in negative which shows that it is an outflow for the borrower.

While this method may be easier as compared to manual calculations, it is still complicated for a layman who does not know how to work on an excel sheet. 

Using EMI Calculator
EMI calculator is an online tool to calculate the loan EMI by providing a few details like loan amount, period and interest rate. The calculator will give you an idea about the monthly EMI that you will have to pay on the loan. It will also display the complete amortization table that will demonstrate a complete breakup of a loan including the monthly EMI, annual outflow consisting of interest repayment and principal repayment. This will help you discover how much interest you are paying or will pay on a loan over a period of time.

You just have to enter the principal amount, interest rate and tenure of your loan. The tool will show you the EMI. If you are still looking forward to take a home loan or a car loan, you can compare these offers by putting different values in the interest rate and tenure section to find out the perfect match for your financial situation. You can use EMI calculators as many times as you want.

Apart from the EMIs, you must also know the type of interest rate that the lender is charging on the loan. The interest rate on home loan and car loan can be either fixed or floating. A floating rate of interest keeps on changing as per the market trends whereasa fixed loan interest rate remains same throughout the loan tenure.You must also choose between the two types at the time of calculating the EMIs. Most of the banks, nowadays, offer loans at floating rates of interest. Other terms like prepayment charges, processing fee, etc. should also be taken into consideration before signing on the dotted line.

To find the best housing or car loan scheme with the competitive interest rate, the best practice is to do a thorough research on the multitude of loan types and look closely at what each one of it is offering. However not everyone has time to deal with such complexities. In that case, it is good to choose the home loan type and calculate the interest rate, EMI, etc. online by using EMI calculator. It is a simple and efficient way to calculate the loan interest rate and other important things with just a few simple clicks on the website. 

Note: The interest rate on home loan and car loan differ widely across banks in India. Most of the times these variations are based on the customer’s credit history. The better will be the credit score, the less will be the interest on the loan and vice versa.

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