From time to time, people need loans according to their different needs. So this is the reason why it is important for loan takers to understand the game of EMI. The longer the EMI of your loan, the lower the amount of payment every month, but the total interest will have to be paid more. On the other hand, EMI is higher in loans with shorter terms, but the total interest is less. So if you do not want to pay more interest, then you should choose a loan with a shorter tenure. So today, we will understand how the EMI of the loan given to you is calculated. Actually, banks calculate EMI with a special formula, which includes interest rate, loan amount, and duration.
What is the formula used to calculate EMI?
The EMI of the loan is calculated on the basis of the principal amount of the loan, interest rate, and loan period. The formula for this is: P × R × (1+R)^N / \[(1+R)^N - 1] is considered important. Here, P means the principal amount of the loan, R is the monthly interest rate, which is calculated by dividing the annual interest rate by 12, and N is the loan period in months.
For example, if a loan of Rs 10 lakh is taken for 10 years at an interest rate of 7.2%, the EMI can be around Rs 11,714. This kind of formula can help the customer understand an easy payment plan every month. However, customers can also calculate the EMI with an online calculator and plan the loan according to their budget.
How does a loan put less burden
In a long-term loan, the EMI per month is less, so it reduces the initial financial burden. But note, the longer the loan period, the higher the total interest payment. On the other hand, loans with short tenure have higher EMIs, but the total interest is less. So, if you do not want to increase the burden of extra interest on the loan, then choosing a loan with a short tenure can be considered the most sensible step. This means that it is beneficial to repay the loan in a short time.
Options for restructuring
If you have already taken a long term loan and now feel that the interest is getting high, then you can restructure the loan. In this, the EMI can be adjusted by changing the loan tenure, but for this you may have to pay more EMI every month. That is why you must calculate the EMI. Actually, the interest rate charged on the loan depends on many factors, such as the loan amount, the total loan period and your credit score. It would be better to understand all the options and bank conditions carefully before restructuring. (Note: The news is based on general information)
Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
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