EMI stands for Equated Monthly Installment, which is a fixed payment amount made by a borrower to a lender at a specified date each month, usually as part of a loan repayment plan. EMI calculation is a formula that helps borrowers determine the monthly installment they need to pay to repay a loan over a specified period.
The EMI
calculation formula takes into account three factors: the loan amount, the
interest rate, and the loan tenure (i.e., the number of months over which the
loan is to be repaid).
The formula for EMI calculation is as follows:
EMI = [P x R
x (1+R)^N] / [(1+R)^N-1]
Where: P =
Loan amount (principal) R = Interest rate per month (annual rate divided by 12)
N = Loan tenure in months
For example,
if a borrower takes a loan of Rs. 1,00,000 at an interest rate of 12% per annum
for a period of 36 months, the EMI calculation would be as follows:
EMI =
[1,00,000 x 1% x (1+1%)^36] / [(1+1%)^36-1] = Rs. 3,322.88 (rounded off to the
nearest rupee)
Therefore,
the borrower would need to pay Rs. 3,322.88 as an EMI each month for a period
of 36 months to repay the loan.
It is
essential to note that the EMI calculation formula assumes a fixed interest
rate throughout the loan tenure, and the actual EMI may vary slightly depending
on the method used by the lender to calculate the interest rate. Additionally,
borrowers should always consider factors such as processing fees, prepayment
charges, and other fees when comparing loan options and calculating their EMI.