How does a bank calculate interest & EMI for loans?

Loans have become an essential part of everyone’s life today, assisting us in achieving some of our most significant life objectives. Loans play an important role in our lives, whether it’s for purchasing a car, a home, or funding our children’s education abroad. However, when it comes to loans, the most crucial term to remember is EMI. EMI alludes to equated monthly instalments, and it refers to the monthly payments we make on a loan that we have chosen.

“EMI installments include both principal and interest payments on the loan amount. In the beginning, the interest component accounts for the majority of the EMI payment. The proportion of interest repayment decreases as the loan term progresses, but the contribution to principal repayment increases.”

On loans, banks will charge more than just the interest rate. Lenders charge a variety of non-refundable fees when getting a loan, including processing fees and documentation fees. These one-time borrowing charges are factored into the loan APR. The true cost of your loan after taking into account the loan interest rate as well as the fees and charges you pay when acquiring a loan is represented by the loan APR, which is expressed as a yearly percentage rate. The annual percentage rate (APR) of your loan is a more comprehensive statistic that indicates the net effective cost of your loan on a yearly basis. It is the internal rate of return (IRR) on the loan for the banks.

Calculator for Loan Amounts or Affordability

If you’re thinking about buying your ideal home or car, you’re constantly wondering how much money you can manage to repay without going into debt. It depends on how much EMI (monthly payment) you can afford and for how long you want to pay it. It would be easier for you to determine how much you can afford if you have an estimate of how much EMI you can pay each month. The loan amount calculator will show you how much you can afford to borrow based on the amount of EMI you can pay each month, the interest rate charged by your bank, and the selected tenure. 

Calculator for the tenure of the Loan

If you want to renegotiate your loan at a reduced rate, you can either cut your EMI or the length of your loan. If you go with the latter option, you can immediately calculate how long it will take to pay back your refinanced loan. If you want to make a partial prepayment on an existing loan, you can use this calculator to figure out how much time you have left on the outstanding principal.

Interest Calculator

Installment loans are increasingly being used to purchase high-end electronic devices, furnishings, and household appliances (such as a refrigerator, TV, or washing machine). Low EMI payments are used by manufacturers and sellers to entice buyers, who fall into the trap without realizing the interest rate on such loans. The interest calculator estimates the interest rate on such loans based on the loan amount (i.e., item price), EMI, and tenure.

EMI calculator

To calculate EMI, simply alter the amount, interest rate, and tenure tabs on the respective EMI calculator to your needs by clicking and dragging. The EMI calculator will project figures for the loan automatically. Once you’ve calculated your EMI, you can apply for the loan by selecting the ‘Apply Now’ option. Keep in mind that the duration and interest rate of the loan you desire to suit your demands must be balanced. If you find the right balance between these criteria and the amount, your EMI will be regulated against your repayment plan. Every month, your EMIs are due on a set date that is communicated to you when the loan is disbursed. The NACH mandate makes loan repayment nearly automatic today, as your EMIs are directly withdrawn from your bank account. The NACH mandate makes loan repayment nearly automatic today, as your EMIs are directly withdrawn from your bank account. However, a set of post-dated EMI cheques is required for security reasons.

Frequently Asked Questions

1. What happens if the interest rate on your loan falls or rises during the term of your loan-

If your mortgage is a floating rate loan and the interest rate falls during the term, a larger amount is applied to the principal component, and the loan is repaid sooner. When the interest rate rises, however, the opposite occurs, and a larger amount of the loan is allocated to the interest component rather than the principle, resulting in a modest change in loan tenure providing the EMI remains constant.

2.   What happens if you only pay off a portion of your loan?

The original loan tenure will be reduced if you partially pay back the loan during the loan term and opt not to adjust your future EMIs, i.e. you return the loan sooner. Your loan tenure will not alter if you elect to minimise your future EMIs because you partially prepay.

3.. What happens if you don’t pay your EMI on time?

If you skip EMIs for any reason, say because you don’t have enough money in your account or for any other reason, the loan’s term will lengthen.

Remember that skipping EMIs reflects poorly on your creditworthiness and may have a negative influence on your credit score. As a result, in the interest of your financial well-being, make sure you borrow prudently and within your means.