Taking a housing loan, a car loan or a personal loan in India is getting extremely simpler by the day.
Are you are planning to buy a house or a car through a loan, but getting bogged down by the exact equated monthly instalment (EMI) figure? It is not that difficult any more. While each bank provides a simple EMI calculator on its website these days, we give you a simple low down on how to calculate your EMI. You can simply rely on a Microsoft Excel for calculating your EMIs or use a mathematical formula.
The Excel spreadsheet is one of the simplest ways for calculating the EMI. In Excel, the function for calculating the EMI is PMT and not EMI. You need three variables. These are rate of interest (rate), number of periods (NPER), and lastly the value of the loan or present value (pv).
The formula which you can use in excel is:
To understand this formula better, let us take an example of Jitin Sharma, 30, a Delhi-based financial analyst who bought a car for Rs 11 lakh for which he made a down payment of Rs 6 lakh. For the rest of the amount of Rs 5 lakh, he opted for a loan from a nationalised bank at the interest rate of 10 per cent per annum for 4 years.
It must be noted that the rate used in the formula should be the monthly rate, which is 10%/12=0.83% or 0.0083.
The number of periods represents the number of EMIs.
=PMT(0.0083, 4*12, 5,00,000)= 12,672
The result will come in negative or red, which indicates the cash outflow of the borrower.
Let’s take another example. Suppose you are paying a quarterly instalment for a loan of Rs 10 lakh at 10 per cent interest rate per annum for 20 years. In such a case, instead of 12, you should divide the rate by four and multiply the number of years by four. The equated quarterly instalment for the given figures will be =PMT(10%/4, 20*4, 10,00,000).
USING MATHEMATICAL FORMULA
It is not always possible to access the Excel spreadsheet everywhere. In such a case, you can use your mathematical mind or an electronic calculator to know how much the EMI comes to. The mathematical formula for calculating EMIs is:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1], where P stands for the loan amount or principal, R is the interest rate per month [if the interest rate per annum is 10%, then the rate of interest will be 10/(12 x 100)], and N is the number of monthly instalments. When you use the above formula, you will get the same result that you will get in the Excel spreadsheet.