How EMI Is Calculated for Personal Loans

Personal loans are popular for financing large purchases and covering unexpected expenses. However, loan repayment can be a rocky road for borrowers who don’t budget effectively.

In this guide, we will discuss how EMI is calculated for personal loans to empower you to better manage debt and understand the essentials of monthly loan payments.

Understanding the concept of EMI and EMI Calculation

EMI stands for Equated Monthly Installment, which is a common repayment method for personal loans.

An EMI is a fixed payment amount that you are expected to pay your lender on a specific date each month. Repaying a loan through EMIs is a simple way to pay down the balance until everything is repaid according to your repayment terms.

EMIs consist of two main components: the principal loan amount and the interest.

Factors that affect EMI calculation

How to calculate EMI manually

The formula used for calculating EMI is:

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

P = principal loan amount R = interest rate N = loan tenure (in months)

If you want to calculate the EMI manually, all you need to do is plug into the formula each of the amounts, which are designated by your loan agreement.

Using online EMI calculators for accurate results

While it is entirely valid to use an EMI formula to manually calculate your EMI, it is often advisable to use an online EMI calculator for the sake of accuracy. Other benefits that come with using an online EMI calculator include:

• Quick results
• Convenient
• It is easy to adjust the values you input
• Many online EMI calculators also give you extra information that is relevant to your personal loan decisions
• You can compare different options with ease

At the end of the day, no matter what tool or method you use to calculate EMI, you should be aware that your real EMI might be different after you actually receive a loan agreement. The lender might use different ways of rounding numbers and selecting variables. If you want to be absolutely sure of an EMI before you lock into a loan, you should clarify with your lender what the precise value of your EMI is.

How to negotiate EMI with lenders

Since EMI directly affects how much you need to budget toward loan repayment every month, it makes sense to want to negotiate your EMI with your lender.

First, you will need to contact a representative of your lender to begin negotiations. Going into the discussion, you should have a clear idea of your expectations, needs, and goals. For example, ask yourself the following:

• Why do I need the EMI reduction?
• Do I have a good track record of paying my bills on time?
• How can I emphasize my creditworthiness and willingness to repay the entire loan?
• Is this lender running any special offers at the moment?

Acquaint yourself with any derogatory marks on your credit report. These marks include past missed debt payments, loan defaults, bankruptcy, foreclosures, and other poor credit behavior. Your lender may ask you about these marks to better understand your situation and assess the risk level of granting you a loan.

As you bring up the topic of wanting a lower EMI with your lender, ensure that you have prepared a clear, understandable proposal that outlines your desired interest rate, EMI, loan tenure, and loan amount. Lenders tend to view borrowers with organized, realistic proposals as more responsible and capable of repaying personal loans.

Finally, you may benefit from being adaptable and showing a willingness to compromise during the loan negotiations. Even though you should have a desired outcome in mind, if the lender shows hesitance in reducing the EMI, consider instead altering the loan tenure instead. A longer loan tenure can also reduce how much you need to pay each month.

If you do end up opting for a longer loan tenure, it’s important to be aware that longer tenures are also associated with greater overall interest paid. As with all loan decisions, make sure that you weigh the pros and cons of each choice before you finalize your loan agreement.

The impact of interest rates on EMI calculation

Your interest rate is a major component that determines your EMI. If everything else remains the same, the higher your interest rate, the greater your EMI.

If you are able to obtain a loan with a lower interest rate, it means that every month, the installment you need to be able to afford will be less. This makes repaying your loan easier and you can enjoy a reduced debt burden.

Because of how much money you can save due to a lower interest rate, it is always a good idea to shop around for personal loans and compare various lenders’ interest rates before you commit to any single one. This is especially true if you are taking out a loan with a long tenure and a large loan amount. Even the tiniest percentage change in your interest rate could save or cost you hundreds, if not thousands, of dollars.

How to reduce EMI burden by increasing the loan tenure

In general, the longer the loan tenure (AKA the duration of your loan), the lower your EMI. This is because the same loan amount is spread out over a longer period of time, which reduces the monthly installment.

If you find your EMI is higher than suitable for your budget and income, it might be a good idea to increase your loan tenure. This can help facilitate your loan repayment since there is more time for you to gather money for repaying your debt.

For borrowers who have already signed a loan agreement, it may still be possible to increase the loan tenure of a loan. This can either be done by requesting an extension with your lender or by refinancing the loan to replace your current loan with a new one.

If there are any unexpected circumstances that have forced you into spending your savings, it could be advantageous for you to mention them while negotiating different loan terms or requesting temporary relief. Sometimes, lenders will be willing to change the terms of the loan to lessen the immediate debt burden on you, which enables you to more easily pay back the loan in the long run.

Here are a few examples of what a lender may agree to, at least temporarily, when renegotiating the terms of your loan:

• Extended tenure
• Lowered EMIs
• Paused loan payments

How to reduce EMI burden by making pre-payments

Making a prepayment is one way to reduce your EMI burden. A prepayment means you are repaying a part (or the entirety) of your loan so that you can more quickly repay the rest of the loan. The prepayment reduces the outstanding balance.

Note that some lenders impose a prepayment penalty on those who make early payments to lower their remaining loan balance. Before you make a prepayment, check your loan agreement to see if you will be charged any fees for making a prepayment.

If you’re having trouble with the EMI burden due to high monthly costs, making even a single prepayment may be a good way to alleviate the future strain that your EMI puts on you. It may also allow you to reduce your loan tenure since there is a lower balance remaining—you would be able to pay back the loan sooner.

The consequences of defaulting on EMI payments

It can be very harmful to your credit score and financial standing if you default on the EMI payments of an installment loan.

A loan default means you’ve missed enough payments to qualify as having defaulted on the loan. The time frame you have before it counts as defaulting depends on your lender and the loan type.

Here are the commonly seen consequences of defaulting on EMI payments.

Credit score damage

The most obvious and prevalent impact of defaulting is the negative effect on your credit score.

Credit scores succinctly express your creditworthiness to lenders. Missing an EMI payment also means that those who perform credit checks on you may be able to see that you have missed a loan payment, which is detrimental to your financial standing when it comes to obtaining loans.

Your future EMIs may increase

Defaulting on EMIs means that in the future with other loans, you might have to pay more due to higher interest rates. This makes it more expensive for you to take out personal loans, which is not desirable, especially if you plan on obtaining a mortgage or auto loan.

Lower future loan amounts

After seeing you’ve defaulted on loan payments before, new lenders might be unwilling to grant you the loan amounts that you need. You can expect it to be harder for creditors to agree to disburse large loan amounts to you. This can hurt your opportunities and financial stability.

Even if you do end up managing to obtain a significant loan amount, it may come with less favorable terms and more stringent requirements.

Late fees

Another drawback of missing a payment is that you will likely be charged a late fee. Late fees vary from lender to lender, but your loan agreement should outline how late fees work for your specific situation.

Late fees usually come in two types: fixed and percentage. A fixed late fee can range between $25 and $50, whereas a percentage late fee may be 3% to 5% of your monthly installment amount. While the late fee might not seem especially high, these fees can easily rack up and become unsustainable if you are not careful with your loan repayment plan.

How to plan your budget around EMI payments

One of the most important parts of a loan repayment plan is knowing how to work your budget around your EMI payments. You don’t want your EMI to become a nightmare to manage.

The main goal of budgeting for EMI is so that you can comfortably meet your loan repayment requirements every month without needing to take out more loans or piling a significant financial burden on yourself.

In case you’re having trouble saving up for your EMI payments, here are a few general strategies that may benefit you. As always, consult a personal financial advisor for individualized advice as this guide cannot serve as official counsel.

Budget and categorize your expenses

It’s advisable for those with personal loans to make a clear budget for all their monthly expenses. This can be done by first reviewing and categorizing your typical expenses, as well as taking into account the potential costs of variable expenses.

Expected expenses include fixed costs like rent and regular payments like utility bills. You might also want to add up how much you spend in a month on each kind of purchase.

Variable expenses include costs such as unforeseen car repair bills, medical bills, house repair bills, and more. They might not take place at all, but if they did, there is often a general ballpark of how much these bills would cost.

Eliminate unnecessary expenses

Entertainment and other luxury purchases are usually recommended to be the first to be limited or eliminated when you have a debt burden to focus on. Unnecessary expenses can be taken off your list of purchases in a month without greatly affecting your quality of life.

Try to limit how much you spend on unnecessary expenses every month until you are certain you can safely budget for your EMI. Once you are positive you can afford the next few months’ EMI without an issue, you may greenlight spending money on non-necessities again.

Prioritize loan repayment

Similar to how unnecessary expenses should be restricted to make room for improved repayment capabilities, it is also a good idea to prioritize EMI payments as a necessary expense every month. This means putting your EMIs on the same list as utility bills, rent/mortgage, and other necessities.

By increasing the priority on saving for your EMIs, you will be more likely to have the money for loan repayment every billing cycle.

About The Author

Ru Chen

Content Writer

Ru Chen is a content writer with several years of experience in creating engaging and well-researched articles. She mostly writes about business, digital marketing, and law. In her free time, she can be found watching horror movies and playing board games with her partner in Brooklyn.

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