EMI = [P x R x (1+R)^N]/[(1+R)^ (N-1)]
( In this formula the variables stand for:
EMI is the equated monthly instalment)
P is the principal or the amount that is borrowed as a loan
R is the rate of interest that is levied on the loan amount (the interest rate should be a monthly rate)
N is the tenure of repayment of the loan or the number of monthly instalments that you will pay (tenure should be in months)
This is the same formula an EMI calculator uses to provide you with the correct EMI payable within seconds.
Let us consider an example to understand EMI calculations in a better way,
For instance, you have taken a personal loan of Rs. 2 lakhs for 2 years at an interest of 20 % p.a.
Firstly, we need to convert the annual interest rate into a monthly rate and the tenure into months.
To calculate the monthly interest rate, we divide the annual interest rate by the number of months in a year, i.e. 12, so monthly 20/12 = 1.66% per month
The 2-year loan tenure must also be converted into months before integrating into the formula i.e. 24 months
Now we have the three variables with us which we can integrate into the formula as follows:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
EMI= [2,00,000 x 1.66/100 x (1+1.66/100) ^ 24 / [(1+1.66/100) ^ 24 - 1)
EMI= Rs. 10, 179
The EMI calculator formula is universal and can be applied to different loans. The variation in EMI value occurs according to the three key variables, i.e. the loan amount, the loan tenure and the interest rate. The EMI payment is directly proportional to the loan amount and interest rates, which implies that with increase in amount and interest rate, the EMI on the loan also increases. However, the EMI is inversely proportional to the tenure of loan, which means that though the amount of paid interest increases with longer tenures, but the EMI payments decrease if the loan is repaid over a longer time period.