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How does an EMI calculation determine my monthly payments?

Curious about EMIs

How does an EMI calculation determine my monthly payments?

The calculation of Equated Monthly Installments (EMIs) is based on a formula that takes into account several factors, including the loan principal, interest rate, and loan tenure. The formula used for EMI calculation is typically referred to as the "EMI Formula" or "Amortization Formula." Here's how it works:

EMI = [P x R x (1+R)^N] / [(1+R)^N1]

Where:
EMI: The Equated Monthly Installment you need to pay.
P: The principal loan amount (the amount you borrow from the lender).
R: The monthly interest rate, which is the annual interest rate divided by 12 and expressed as a decimal.
N: The total number of monthly installments or the loan tenure in months.

Let's break down how this formula works:

1. Principal (P): This is the amount of money you borrow from the lender. It is the total loan amount.

2. Monthly Interest Rate (R): The annual interest rate is divided by 12 to get the monthly interest rate. For example, if your annual interest rate is 8%, the monthly interest rate (R) would be 8% / 12 = 0.6667% or 0.006667 as a decimal.

3. Loan Tenure (N): This is the total number of months over which you will repay the loan. It is typically specified in your loan agreement.

4. EMI Calculation: The formula calculates your fixed monthly EMI based on the principal (P), monthly interest rate (R), and loan tenure (N). This calculation ensures that the EMI remains the same throughout the loan tenure.

The result of this calculation is the fixed EMI amount you need to pay each month to repay the loan, covering both the principal repayment and the interest payment. As you progress through the loan tenure, the proportion of the EMI amount allocated to principal repayment gradually increases, while the portion allocated to interest decreases.

It's important to note that slight variations in EMI amounts can occur if lenders use different methods of rounding off decimals in the calculation. Additionally, some lenders offer the option of fixed or reducing balance EMIs, which can affect the calculation slightly. Therefore, it's always a good practice to use an EMI calculator provided by your lender or a trusted financial institution to get an accurate EMI amount for your specific loan.

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