A loan means a large sum of money that is borrowed and is to be paid back with interest in monthly installments or EMIs. For a housing loan, prior planning is required and hence you should know what kind of EMIs you can afford. You can use a housing loan interest calculator to tell you the exact EMI that you would need to pay for the desired loan amount. You can calculate the EMI for different tenures and see what suits your budget better. This article gives a detailed explanation of how the calculator works for your understanding.
What Are the Factors Affecting Your EMI?
Table of Contents
The Equated Monthly Installments or EMIs for a loan depends on three factors.
1. The Loan Amount (Principal)
This is essentially the money needed by you for the purpose of paying the cost of the property. You can get a proportion of the property value as a loan depending on your financial capability. It is generally capped at 60 times of your net income. You can get an estimate of this eligibility criterion using the home loan calculator. The EMI value is directly proportional to the loan amount taken i.e. the higher the loan amount, the higher will be the EMI.
2. The Interest Rate (R)
This represents the interest charged on the principal amount you have borrowed. The interest rate remains fixed, but as it is applied on the outstanding loan amount, the interest amount paid during the initial years is higher and it reduces as the outstanding amount declines. You can calculate the interest amount on the outstanding balance using a home loan interest calculator. The EMI value varies directly with the interest rate. A higher interest rate means higher EMI. The interest and the part payment of the principal together compose the EMI. Hence, the principal component paid off increases as the interest component decreases.
3. The Tenure (No. of Instalments)
The tenure is the time duration chosen by you to pay off the loan with interest. If you choose a longer tenure, the EMIs paid by you are smaller. The banks in India offer 30 years as the longest tenure depending on the age of the applicant. In case of longer tenure, though you may pay smaller EMIs, the total interest paid is more than what you would pay for a shorter tenure.
Let’s consider a loan amount @8.65% interest for different tenures. You would pay an EMI of INR 780 for 30 years as compared to INR 994 for 15 years. But, the interest that you would pay over 30 years is INR 1.81 Lakhs as compared to INR 78,920 in 15 years. This should be kept in mind when deciding on the tenure of the loan. This can be easily verified with the use of a home loan EMI calculator.
How to Calculate the EMI?
If you are wondering how to calculate home loan EMI, the easiest way is to use an EMI Calculator. If you wish to verify the calculations, you can use Excel or you can manually check with the help of the EMI formula.
For a housing loan interest calculator, all you need to do is enter the loan amount, the rate of interest and tenure to get the EMI. It will also give you the amortization schedule giving the interest and principal component of each EMI. This will be discussed in the next section.
If you wish to use Excel, you can use the function PMT. You will need to enter the three variables, namely the rate of interest (rate), number of installments (nper) and the present loan value (pv). Points to remember here are that the rate entered should be monthly or quarterly as per your agreement and not annual unless you are paying annual installments. The same applies to the number of installments.
For manual calculation, you can use the formula below:
In the above formula, P is the principal loan amount, r refers to the monthly interest rate and n is the loan repayment tenure in months.
An Amortization table gives you the breakup of your EMI by interest charged and Principal paid for the month. It also gives you the outstanding principal after the payment of each installment. The interest for every installment is calculated based on this outstanding balance. This is what an amortization table looks like.
As you can see, all the installments are equal, but the interest paid and the principal paid changes. This is because you pay more interest in the initial stages and hence there is a lower payment towards the principal. Towards the end of the tenure, the principal pay-outs are larger than those for the interest. By the end of the 1st year, you would have paid only 3-4% of the principal. All this easily calculated with the help of a housing loan interest calculator.
Why Use a Loan Calculator?
Considering the convenience offered by Loan EMI Calculators, it is advised to use EMI calculator as opposed to Excel or manual calculation. It offers multiple benefits by saving time from tedious calculations and provides very accurate results. Besides that, it also gives a breakup of the interest and the principal component to understand and plan future payments. You can also decide on the tenure after checking out the results with different schedules.
Using a housing loan interest calculator is as easy and beneficial as that!