A personal loan can be a great way to handle immediate cash requirements. But before you sign those documents, having a clear understanding of the Equated Monthly Instalments (EMIs) is crucial. EMIs determine how much the loan costs in total and how long it will take to pay off, directly impacting your monthly budget and your overall financial health. However, loan EMIs can be confusing for many individuals since they do not understand how EMIs are calculated and work. So, here is a breakdown of the top 5 things you should know about your personal loan EMIs.
- Meaning of EMI
EMI is the amount you will be required to pay each month until the loan is fully repaid. When you take out a loan, your EMIs will be decided depending on the personal loan interest rate, loan amount, and loan tenure. The main advantage of an EMI is that it helps to break down the cost of repaying a loan into manageable instalments.
- Components of a loan EMI
Your monthly EMI payment consists of two components: the principal amount and the interest charged on the loan. The principal is the original amount you borrowed from the lender, while the interest is the fee charged by the lender for providing you with the loan. Therefore, your EMI goes towards both the interest and principal components of the borrowed amount.
- Factors affecting a personal loan EMI
Your monthly personal loan EMI is calculated based on several factors, including the total loan amount, the interest rate, and the loan tenure.
- Loan amount – The total amount you borrow from the lender. The higher the loan amount, the higher your EMIs will be.
- Interest rate – The percentage of the loan amount you pay to the lender as interest. Lenders calculate the interest based on factors like your income, credit history, repayment capacity, prevailing market situation, etc.
- Loan tenure – The length of time over which you will repay the loan. The longer the tenure, the lower your EMIs will be because you will have more time to repay the loan. But this will also increase your overall interest outgo.
- Calculation of your personal loan EMI
EMI is calculated using the following formula:
EMI = [P x R x (1+R) ^n] / [(1+R)^ n-1]
P= Principal amount, R= Interest rate, n= Monthly instalments
Most lenders also provide a personal loan EMI calculator where you can input the loan amount, interest rate, and tenure of the loan. The calculator will then use this information to calculate the monthly EMI. The tool can help you plan your finances in advance and ensure that you can afford the loan. With the right calculations, you can hit the personal loan apply button with confidence.
- Consequences of missing an EMI payment
If you miss an EMI payment, you will be charged a late fee as a penalty, which will increase the total amount you have to repay and may also negatively impact your credit score. With a bad credit score, you may be charged higher personal loan interest rates in the future. And if you continuously miss your EMI payments for three months or 90 days, it will be considered a default and your lender might add you to the defaulter’s list. This will impact your repayment history and further loan-related opportunities.
By understanding these personal loan EMIs concepts, you can be better prepared to manage your repayments. Just remember to do your research, compare interest rates from multiple lenders, look for hidden charges, and read the fine print before finalising a loan.