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Lending is an old process that aims to provide necessary funds to potential borrowers. The conditions being, the borrower should repay the loan amount at a fixed rate of interest and within a specified period of time. Repaying the whole amount altogether can prove to be a burden on the borrowers. This is why, EMIs fulfill the responsibility to divide the burdens into easy equated monthly installments that a borrower has to pay every month of the tenure. Nowadays, an EMI calculator efficiently does the calculation rapidly to provide an overview of the possible financial responsibility. Read on to know more about how an EMI calculator works.
EMI is a monthly payable installment of a loan repayment. Borrowers use this to consider EMI as a crucial factor before taking on a loan. Because it affects their monthly budget and they have to determine their financial ability to repay the loan without any drawbacks. This is why, EMI calculation is mandatory for the borrowers before borrowing the required funds from the lenders. And a loan EMI calculator helps them. A loan EMI calculator is a financial instrument that online lenders and credit platforms provide to borrowers free of cost. No matter the nature of the loan you’re going to apply for, an EMI calculator is able to calculate when you put in the loan amount, tenure, and rate of interest (ROI) in the calculator. The fast and accurate EMI calculation saves time and helps to manage your monthly budget to get the loan that is best suitable for you.
When paying an EMI, you’re repaying back a part of the principal and also some interest. This interest can be at a fixed rate or a floating rate. Unlike fixed ROI, floating ROI keeps altering from time to time. And the EMI will also keep fluctuating. But the formula used to calculate the EMI has always been constant which is EMI=[PxRx(1+R)N]/[ (1+R)N-1]. Here you should know the crucial components that make this formula, such as P or principal, R or ROI, and N or tenure.
For eg, if you borrow Rs. 2,00,000 for 2 years at 20% ROI p.a., then as per the formula
N= 2 year= (12x2) months= 24 months
R= 20% p.a.= 20/12= 1.66% p.m.
So, the EMI will be [PxRx(1+R)N]/[ (1+R)N-1]
This entire calculation can be very time-consuming, but not for an online EMI calculator. It calculates any amount with ease.
The calculation procedure of an EMI calculator requires the basic yet variable factors which are, loan amount, rate of interest, and duration. And the EMI will vary depending upon these factors.
Also known as the principal, the loan amount is the main factor on which the interest will be payable. Irrespective of the loan type, the EMI will keep expanding during the calculation if chosen a higher amount.
The interest that is going to be paid also depends on the ROI you’re choosing or the lender is going to apply. This can vary for different loans and lenders. Also, the types of interest such as floating or variable may also make a crucial difference in the EMIs.
Depending upon the nature of the loan that you’re planning to apply for, the tenure will vary. It also is up to the lender and the amount you’re asking for. Besides this, the ROI also connects with tenure. An EMI calculator manages all of these variable components and determines the exact result of the calculation.