In India, the calculation of loan EMI (Equated Monthly Installment) and interest rates generally follows the same principles as explained earlier. The formula used for EMI calculation is based on the reducing balance method, where the interest is calculated on the outstanding principal amount.
Here’s how the EMI and interest rate calculations work in India:
EMI Calculation Formula:
The formula used to calculate EMI in India is:
EMI = [P * r * (1 + r)^n] / [(1 + r)^n – 1]
Where:
EMI = Equated Monthly Installment
P = Principal Loan Amount
r = Monthly Interest Rate (Annual Interest Rate / 12 / 100)
n = Number of Monthly Installments (Loan Tenure in Months)
Interest Calculation:
In India, the interest on a loan is typically calculated using the reducing balance method. In this method, the outstanding principal
As an illustration, suppose you took out a loan for ₹1,000,000 with a 12-month term and a 10% annual interest rate. 10% divided by 12 would equal a monthly interest rate of 0.8333%.
Initial Month:
The outstanding Principal is ₹1,000,000 and the monthly interest payment is ₹1,000,000 * 0.008333, or ₹833.33.
Principal Repaid is equal to EMI minus interest, or 833.33.
New Outstanding Principal = Current Outstanding Principal – Second Month’s Principal Repaid:
New Outstanding Principal from the prior month = Outstanding Principal
Outstanding Principal times 0.008333 equals the monthly interest rate.
Repaid Principal = EMI – Interest
Outstanding Principal – Principal Repaid equals New Outstanding Principal.
Until the remaining principle reaches zero at the end of the loan term, this procedure continues.
An amortisation schedule is a table that displays the breakdown of each EMI payment during the loan term into principle and interest components.After each payment, it also shows the sum that is still owed.
Though different financial organisations may use somewhat different calculating techniques, the fundamental ideas are the same in all cases. The lender will send you an amortisation schedule, which gives you a thorough insight of your repayment strategy, when you apply for a loan in India.
Before signing any loan agreement, it is crucial to comprehend the terms and circumstances of the loan, the interest rate, and the EMI amount.
