 ### 10 AUGUST, 2021

Loans are financial instruments where you borrow a sum of money from a bank or NBFC in exchange for paying interest and repaying the principal amount within a time frame by Equated Monthly Installments (EMI), which is a monthly payment schedule given by the bank.

Personal loans are loans taken for personal use, such as a loan for marriage or travel or to purchase furniture and electronic equipment. Personal loans are approved easily, and even the loan amount is credited to your account on the same day. As these are collateral-free loans approved based on your financial history, these loans charge a higher rate of interest. With a higher interest rate, the EMI also shoots up as these EMI’s are determined on the amount of loan and the duration of repayment.

Many factors may affect the EMI, such as -

1. Loan tenure - Longer the tenure, shorter the EMI, and vice versa.
2. Rate of interest - Depending on many factors such as an individual's credit score, RBI rate for the market, eligibility, etc.
3. Loan amount - Higher the loan amount, the higher will be the EMI.

There is a specific formula to calculate the same, which we will discuss below.

The formula to calculate an EMI is,

EMI = [P x R x (1+R) ^ N] / [(1+R) ^ (N-1)]

Where

• P = Principal amount (the base amount of the loan)
• R = Rate of interest (the percentage of interest paid on the loan amount). It is divided by 12, which gives us the rate of interest every month.
• N = Tenure of the loan (in months)

This formula can be a bit tricky when you do it manually. Instead, you can use other forms of calculation such as MS excel sheets where -

- In the cellblock, type = PMT (RATE,NPER,PV,FV,TYPE)

- Where

1. RATE is the interest percentage,
2. NPER is the number of years on loan repayment x 12 months, i.e., if you want to repay your loan in 5 years, multiply 5 by 12.
3. PV is the principal amount of the loan.
4. FV is the future or the final value of the loan, which can be avoided to avoid confusion.
5. TYPE is the excel formula where if you are calculating the EMI at the start of the loan, then write 1, or if the EMI is calculated at the end of the loan, you have to write 0.

- Type in this formula and click Enter, and you will get the EMI for the loan.

Instead of going through all these hassles, one can easily calculate the loan amount on personal loan EMI calculators available online, which are fast and efficient.

Also, your relationship manager will inform you of the EMI amount and show you the whole calculation when you apply for a personal loan.

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