It’s an EMI world.
Formerly, limited range of products, say personal loans or home loans and alike loan products were available on EMI. But now the scenario has completely changed. E-commerce world has now so much to offer.
From household appliances to electronic gadgets, it’s all online. Apart from this radical change, one of the significant effects is on affordability of products through EMI option. Merchants now offer reasonable instalment amounts, which defers the lump sum paid and breaks it into a number of instalments over a certain period.
Simple, isn’t it?
But do you know what does EMI means? What does it constitutes? What if you want to calculate the EMI of your loan product?
Let us answer all these questions here and make it both sound and read simple for you.
Let us first understand the acronym “EMI” in simple terms. EMI stands for equated monthly instalment. Equated means same in value, monthly means every month, and instalment means the amount due.
Hence, an equated monthly instalment (EMI) means a certain amount to be paid by the borrower to the lender for the predetermined period on a monthly basis.
EMI depend on three components – loan amount, tenure of loan and rate of interest. The number of EMI you need to pay and the amount of instalment are inversely proportional to each other.
For example – Mr. X wants to purchase a mobile phone online worth Rs. 15000.00 wherein the EMI mentioned is Rs. 1400 per month. In case Mr. X purchases it on EMI, then he will be required to pay Rs. 1400 per month for approximately 11 months (Rs. 15000/ 1400 = 10.71 approx ~ 11 months). This is how EMI works in this case.
Basically, EMI is a contemporary version of loan, wherein the pinch of lump sum payment is deferred and is broken down in parts to be paid over a period of time.
Principal and interest component:-
Though the amount of EMI is constant throughout the term contracted, it comprises of the unequal combination of principal and interest.
For example Mr. X takes a personal loan of Rs. 5,00,000/- for a period of 3 years with an interest of say, 12% p.a. This formula for calculating EMI is:
EMI = ( P * r * (1+r) n
[(1+r) n – 1]
Where P = Principal amount; r = rate of interest, n = Tenure
Principal (P) = Rs. 5,00,000.00
Interest (r) = 12%/ 36 = 0.0033
Tenure = 3 years or 36 months
EMI = (500000 * 0.0033 * (1+0.0033) 36
[(1+0.0033)36 – 1]
= Rs. 14762 approx 
Hence the total amount payable will be Rs. 14762*36 = Rs. 531432, wherein the interest component is Rs. (531432-500000 = 31432).
In this manner, the total amount of loan is repaid inclusive of the basic amount i.e. principal and the interest component.
Understanding the calculation of EMI via excel sheet:-
It very simple to calculate EMI in the excel sheet following the below steps, as shown in the snapshots taken:
Example: In the following example, we will calculate the amortization schedule of loan repayment through excel sheet alongwith the formulas mentioned below:
By feeding the information in the formula, as mentioned, you derive the monthly instalment payable. In this case it amounts to Rs. 7230.48 ~ Rs. 7230.00
After we get monthly instalment amount, we now calculate our amortization table, which signifies the schedule of payments to be done by the borrower.
In the table given above, let us first understand the columns mentioned:-
(A) – Number of payments to be made, which is 36 months or 3 years in this case. Total number of months are taken herein, as we are calculating the monthly instalment payment amount.
(B) – Monthly instalment, as calculated above, which remains constant through the tenure.
(C) – The interest component is calculated as below. The highlighted portions shows the formula placed in excel sheet.
(D) – This column is the principal component which is calculated as shown below – [(B) – (C)], as highlighted below:-
(E) – This column is the balance outstanding which is calculated as shown below – [(E) – (D)], as highlighted below:-
By following the above steps you will be able to calculate the entire series of payments to be made by you in the period of 36 months.
Also, you will see that in the 36th month, the balance left is copied to principal column and the difference between monthly instalment and principal is mentioned in the interest column. In this way all dues are settled at the end of the contracted period.
Takeaway – EMI online calculator:
Apart from the excel calculation, there are many online sites that help you calculate EMI by merely entering the amount of the loan product.
For example: Click on this link https://www.hdfc.com/emi-calculator , the following window will appear on the screen, wherein you need to enter the loan amount, tenure and the rate of interest.
Let us take the previous example, in which Mr. X takes a personal loan of Rs. 5,00,000 for a period of 3 years with an interest of say, 12% p.a. The monthly EMI through the above calculator will be:
Now we can say- Simple it is!
By this time, you already know what an EMI is, constituents of EMI, practical approach to EMI calculation in excel as well as online. Apart from these, you must also know that the amount of EMI may differ under two similar circumstances. This may be due to the system of calculation followed – flat rate system or the reducing balance system.
So now you are all set to choose the best EMI option that will fit into your budget and make a pre determined schedule of expenses basis the schedule of payments learned above.
At the end, let me ask you a simple question “Is EMI option a healthy affair”?
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 Note: The amount of EMI also depends as to whether it is calculated under flat system or reducing balance system.