# How to Calculate EMI on your Loan

When you are applying for a loan, it is prudent to check about the repayment terms of that loan to ensure that the loan you are availing is within your repayment ability. In simple words, it is always good to ensure that you will be able to service the loan every month without any additional stress on your finances.

The loan products available in the market presently come with two types of repayment structures:

1. Equated Monthly Instalments (EMI)
2. Non-Equated Monthly Instalments

## Equated Monthly Instalments (EMI)

EMI is the most commonly used option to recover the loan amount along with interest over the tenor of the loan. As the name suggests, monthly installments are equated across the tenor so that the monthly installments payable by the borrower remain the same for the entire tenor of the loan. Here is a small illustration to help you understand how to calculate EMIs on your loan:

Loan Amount – Rs. 10 lakhs

Loan Tenor – 10 years

Rate of Interest – 12% per annum

 Year Opening Balance Repayment Interest Principal Repaid Closing Balance 1 10,00,000 1,76,984 1,20,000 56,984 9,43,016 2 9,43,016 1,76,984 1,13,162 63,822 8,79,194 3 8,79,194 1,76,984 1,05,503 71,481 8,07,713 4 8,07,713 1,76,984 96,926 80,058 7,27,655 5 7,27,655 1,76,984 87,319 89,665 6,37,990 6 6,37,990 1,76,984 76,559 1,00,425 5,37,565 7 5,37,565 1,76,984 64,508 1,12,476 4,25,089 8 4,25,089 1,76,984 51,011 1,25,973 2,99,116 9 2,99,116 1,76,984 35,894 1,41,090 1,58,026 10 1,58,026 1,76,989 18,963 1,58,026 – Total 17,69,845 7,69,845 10,00,000

For the sake of simplicity, the repayment has been assumed to be on a yearly basis.

As is also evident from the table above, the features of EMI option are as below:

1. Monthly repayment amount remains the same.
2. The principal repayment is the lowest during the first EMI.
3. The principal, being repaid, steadily increases over the loan tenor.
4. The interest amount decreases over time due to reduction of the outstanding principal amount.

## Non-Equated Monthly Instalments

Considering the financial cushion available with the borrowers, individuals may consider having non-equated installments which comprise of the equated principal repayments along with the recovery of the interest for the period. Here is a small illustration to help you understand how such installments are calculated:

Loan Amount – Rs. 10 lakhs

Loan Tenor – 10 years

Rate of Interest – 12% per annum

 Year Opening Balance Repayment Interest Principal Repaid Closing Balance 1 10,00,000 2,20,000 1,20,000 1,00,000 9,00,000 2 9,00,000 2,08,000 1,08,000 1,00,000 8,00,000 3 8,00,000 1,96,000 96,000 1,00,000 7,00,000 4 7,00,000 1,84,000 84,000 1,00,000 6,00,000 5 6,00,000 1,72,000 72,000 1,00,000 5,00,000 6 5,00,000 1,60,000 60,000 1,00,000 4,00,000 7 4,00,000 1,48,000 48,000 1,00,000 3,00,000 8 3,00,000 1,36,000 36,000 1,00,000 2,00,000 9 2,00,000 1,24,000 24,000 1,00,000 1,00,000 10 1,00,000 1,12,000 12,000 1,00,000 – Total 16,60,000 6,60,000 10,00,000

For the sake of simplicity, the repayment has been assumed to be on a yearly basis.

The typical features of such repayment option are as below:

1. Monthly repayment amount reduces, as the loan gets repaid due to lowering interest amount.
2. The principal repayment remains the same across the tenor.

## Which of these two repayment options is better?

There is no single right answer, as the same depends upon the financial condition and repayment cushion available with the borrower. If one can afford to pay higher amounts in the initial years, then the second option, as discussed above, can be considered to be better. The total interest outgo will be lower due to higher principal repayment in the earlier years. On the other hand, EMI option gives a fixed budget to the borrower for their financial plan. As such, both options have their pros and cons, and need to be analyzed on an individual basis.

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## Simardeep Singh

Simardeep Singh is a Chartered Accountant based in Delhi. He loves sharing his knowledge about personal finance and investment.

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