While a personal loan can prove to be immensely helpful, especially in hours of distress, it is always advised that you first understand your exact needs before you delve into a personal loan application.
These days getting a personal loan has become easier than ever before, mainly due to the fact that lenders now offer minimal documentation and instant approvals, and luckily with this, the process of calculating your EMIs beforehand has also gotten simpler.
Thus, in today’s article, we will understand exactly how you can calculate your personal loan EMIs beforehand and assess whether you should take a personal loan or not. Without further ado, let’s get started.
Why Should You Calculate the EMI of Your Personal Loan?
While the reason might be obvious as to why you should calculate your personal loan EMIs in advance, however in times of distress, the need to follow this process might escape our minds, thus letting us understand this better.
One of the only cons of availing the services of a financial lending instrument is the fact that if you cannot make the repayments on time, your credit score will get severely affected. In simple terms, your credit score can be understood as a numerical measure of your credit history assigned to by a competent credit rating agency. In India, there are two main credit rating agencies Experian and CIBIL, and both of these take into account the following factors to calculate your credit score.
- The number of loans you have taken in the past
- The total amount of credit you have utilized in the past
- The total number of timely payments you have made
- The total number of late payments you have made
All of these factors are taken into equal consideration, and your credit score is calculated on a scale of 900. As you can understand from the above illustration, credit rating agencies take the number of late payments you have made into high consideration while calculating your credit score. Thus, even if you miss one payment, it immediately gets reflected in your credit history, thereby decreasing your overall credit score.
Calculating the EMI amounts beforehand can save you from this loss, as you will essentially be equipped with the power to plan your finances ahead of time, such that you can diminish the chances of default to a great extent.
However, How Can We Calculate the EMI Amount Beforehand?
In order to calculate the EMI amount of your personal loan, the following formula can be used,
EMI = [P x R x (1+R)N ]/[(1+R)N-1]
- EMI stands for Equated Monthly Installments, meaning the amount you are liable to repay every month.
- P stands for Principal, meaning the total amount of loan you borrowed from the lender.
- R stands for Rate of Interest, meaning the interest rate on your loan; it can be calculated both monthly as well as annually, and
- N stands for the total tenure of the loan
Let us better understand the importance of this formula with an example.
For instance, if you take out a loan with P-value as ₹10,00,000, R-value as 12% p.a, and N value as 48 months, then as per the above formula, your
- EMI will be ₹26,334 per month
- You will pay a total interest of ₹2,64,024 on the loan amount
- And in total, you will be required to repay ₹12,64,024
One of the best aspects of this particular mathematical formula is the fact that you can use it both manually as well as in MS Excel to save you from the torment of long calculations.
Another way to calculate the EMI of your personal loan would be to make use of a personal loan EMI Calculator. These days most lenders and loan aggregators across India have an EMI calculator present on their website as well as their smartphone applications, and all you need to do is input the total amount of loan you want, the rate of interest you were offered, and also the tenure of the loan, after which you will have the EMI amount in front of you.
Fine-Tuning Your Requirements
Once you have the EMI amount in front of you, the entire planning process becomes much easier, and at this stage, you also have the choice of fine-tuning your EMI by undertaking the following steps.
Change the Loan Amount
Most personal loan lenders in India have offers starting all the way from ₹5,000 to ₹500,000, thus equipping you with complete freedom to not only choose the amount you require but also save on interest amounts. Unlike traditional lending instruments where the loan amount is fixed, in a personal loan, you can fine-tune the loan amount to your preference and only pay for the amount you use.
Most personal loans in India arrive with a flexible repayment policy wherein you have the option of fine-tuning both the EMI amount you will be comfortable in paying every month along with the date of repayment. Since this feature is mostly missing from traditional lending instruments, it equips you with the added benefit of planning your repayment in advance and also better managing your personal finances.
As compared to traditional lending instruments where you are required to fill out a physical application, most personal loans in India arrive with a completely online application process. Not only does this equip you with the advantage of completing the entire application from the comfort of your home, but also being able to edit the loan amount at any stage of the process before final submission.
Along with this, these days, you can also locate calculators on the internet, which let you arrive at an estimated loan amount you will be approved for, according to your monthly salary. In this scenario, the calculator takes into account that in no case, the total EMIs you pay in a month should exceed 45% of your net income, thus giving you a rough estimate beforehand.
Calculating the EMI amount of your personal loan beforehand not only lets you plan your personal finances better but, taking into account the other factors, lets you truly decide if you require one in the first place.