A personal loan comes to the rescue when there is no way out from a financial crisis. People often prefer going for a personal loan because of its convenience that comes in the forms of easy processing, absence of collateral, minimal documentation, etc.
This loan can be considered for various reasons including education, holiday, renovation of house, marriage or the likes. Besides the by-default perks, personal loans are also sanctioned swiftly, which makes it the most viable option in emergencies.
However, this type of unsecured loan also brings a few cautions that one must not ignore. The most important one being the Equated Monthly Instalments (EMIs), which the borrower would be paying through the amortization period.
The next question that pops in mind is how the EMI on a personal loan is calculated? What are the factors that affect personal loan EMI? Let us learn all these in detail.
How to Calculate Personal Loan EMI?
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The method for the calculation of EMI is the same for every type of loan. However, one does not need to go through any tedious calculations for doing the same, thanks to the availability of the personal loan calculator. This tool is available on many websites and shows the EMI amount for specific inputs. Readers can click here to know more.
There are several benefits of using a personal loan calculator. The most important one is that it helps the borrower in proper budgeting and gives a prior idea of the future financial situation before actually availing of the loan.
A personal loan calculator requires three inputs namely, the principal loan amount, loan repayment tenure, and the rate of interest levied. This is because all three are factors that affect personal loan EMI.
Factors Affecting Personal Loan EMI
As said above, principal loan amount, repayment tenure and interest rate are the key factors on which the personal loan EMI depends. Hence, the borrowers must be clear about what these elements are and how they affect the EMI.
Granted, using a personal loan calculator does not come with the compulsion to have this knowledge but it is the borrower’s responsibility to have complete knowledge of all the important aspects.
Principal Loan Amount
As clear from the name itself, the principal loan amount is the total amount of loan sanctioned by the lending institution. One should not confuse this with the pre-approved loan amount because both are entirely different.
The pre-approved amount shows your eligibility but the sanctioned amount the actual sum of money you would get. The more the loan amount, the higher would be the EMI for a particular tenure and interest rate and vice versa.
The final sanctioned amount depends on several factors such as the borrowers’ credit score, financial condition, net monthly income, etc.
Loan Repayment Tenure
It is the period in which the borrower has to repay the entire loan amount in parts (EMI) in order to close the loan amount. For personal loans, the tenure can be as less than 12 months and can be as high as 5 years, depending on the loan applicant’s eligibility.
The EMI is inversely proportional to the repayment tenure, which means a long tenure means a lesser EMI amount and short tenure means a higher EMI amount. Also, lenders offer different interest rates for different loan tenures. In general, the rate of interest is low for short tenures and vice versa.
Rate of Interest
The interest rate defines the extra amount that the borrower would be paying along with the principal sum. In the case of personal loans, the interest rate starts from 10-12% and can be up to 25%.
Although the rate of interest varies from bank to bank, the trends are more or less the same. As obvious, the higher the interest rate, the more would be the EMI and so on. Not to miss, there are different types of interest rates as well such as fixed interest rate, floating interest rate, etc.
Best Practices to Follow While Borrowing a Personal Loan
Since we are clear on the factors that determine the personal loan EMI, the next thing to learn is the ways that help to avoid any financial crunch while repayment.
- Borrow as per your needs and not based on your eligibility. If you are having a healthy credit rating, lenders will be eager to sanction a higher loan amount but you should not fall into that pit. Evaluate your requirements and finalize the amount before applying anywhere.
- Compare the interest rate offered by various lenders so that you can get the desired amount at a lower cost. Also, make sure that this does not come by compromising other benefits, which you cannot afford to lose.
- Evaluate your repayment capacity and choose the amortization tenure accordingly. Moreover, enquire about the prepayment charges and other important things before you fill any application.
Besides the aforementioned suggestions, it is also important to maintain a good credit history. This, in turn, enhances the credit rating that would allow you to get a personal loan at a much lower cost along with a range of benefits.