How to Calculate Your Personal Loan EMI Manually (and Why Lenders’ Numbers Differ)

Most people taking out loans trust the EMI on a lender’s screen without questioning where it comes from. In truth, however, understanding the logic behind each instalment you make puts you in complete control. It allows accurate estimation of affordability and sensible comparison between offers and ensures that any quoted EMI matches your own calculations, no matter how large or small the discrepancy seems.

It is a valuable skill to be able to explain to anyone considering personal loans for a wedding or medical need what constitutes an EMI so they can avoid surprises later.

What Goes Into an EMI?

An EMI is made up of three basic components which always combine in much the same way, and knowing what they are makes a huge difference to calculating the instalment.

• The Principal Amount: 

This is the amount of money you are borrowing, and reducing it, if at all possible, is often the simplest way of lowering your instalment amount.

• The rate of interest:

Lending institutions charge interest as a percentage of the money lent, and this is calculated annually, but you make instalments based on a monthly basis. To calculate manually, you will have to divide the quoted rate by 12 to get a monthly rate.

• Time taken:

This is the length of time (in months) over which you will make repayments, and a longer tenure means smaller instalments, although it increases the overall interest paid.

How to Calculate Your EMI annually?

With the three key components in mind, it becomes possible to calculate your monthly instalment manually.

• Start with the formula:

An EMI is a monthly figure which covers two amounts: the interest due and a portion of the money actually borrowed. The purpose of an EMI is to pay off the interest for the given month.

This calculation has been reduced to a formula: EMI = P.r.(1 + r)n / ( (1 + r)n – 1)

which in turn needs:

To calculate P.r.(1 + r) ^n, you need the amount of money to be borrowed (P), the interest per month (r), and the tenure in months to be converted later (n). Divide this number by (1 + r) n – 1, and you will arrive at the monthly instalment.

• Follow the three steps:

Use these three steps to help you calculate your instalment manually.

1. Convert the quoted rate to a monthly rate and convert the proposed length of the loan in years to months.
2. Calculate the growth factor (1+r) raised to the power of n. This might seem a little complicated, but most mobile calculators will let you do it directly and accurately.
3. Multiply and divide as appropriate to find your instalment: P.r(1+r)n / ( (1+r)n – 1). That will give you the amount to put towards the loan every month.

• Check beyond the instalment itself:

Once you have your instalment, if you multiply the monthly payment by the total number of months and subtract the value from the original amount borrowed, you can work out the overall interest to be paid on the loan, which may vary.

Why Lenders’ Figures May Vary?

There seem to be several small but cumulative reasons to explain why a lender’s EMI calculation for personal loans may vary. These include:

• Rounding the instalment amounts:

By rounding to the nearest rupee, lenders sometimes adjust the total payment, so any small change in rounding may affect the final result.

• Charging interest for the number of days in instalments:

If funds get transferred partway through a month, an additional fraction of interest may get charged.

• Adding fees and levying interest on the total:

Processing fees and taxes may be withheld from the loan amount or added on to it. In the former case, the effective principal changes and, with it, the instalment.

• Different interest calculation method:

The formula here works on a reducing balance method of calculation and will give a slightly lower EMI than a flat-rate method would produce. Always ask for cancellation.

Conclusion

Understanding how an EMI for personal loans is broken down is a simpler matter of knowing three main components and how they interact. Armed with this information, it becomes possible to double-check any lender’s calculation or to identify any discrepancies, as well as giving you food for thought with regard to your own finances as you work out a feasible budget for the repayments.

If you’re in the market for personal loans from trustworthy sources, take a look at Bajaj Finance App offers; they have an online EMI calculator you can use to check your manual calculations and plenty of information to help you work out the deal that suits you best.