Reason to Pay OFF Your Bank Loan ASAP

How Bank Loan EMI is calculated

In this post we will learn how do we calculate monthly EMI for home Loan (or any Loan) and how increasing tenure does not help much after a certain point.

In Housing Finance, Equated Monthly Installment(EMI) refers to the monthly payment towards interest and principal made by a borrower to a lender. EMI is calculated using a formula that considers.

- Loan Amount
- Interest Rate
- Loan Period

Formula to get EMI = ( L x i ) X (( 1 + i ) ^ N) / ([(1+i)^N] - 1)

Where,
L = Loan amount
i = Interest Rate (rate per annum divided by 12)
^ = to the power of
N = loan period in months

Assuming a loan of Rs 1 Lakh at 11 percent per annum, repayable in 15 years,
the EMI calculation using the formula will be :

EMI = (100000 x .00916) x ((1+.00916)^180 ) / ([(1+.00916)^180] - 1)

====> 916 X (5.161846 / 4.161846)

EMI = Rs 1,136

Note : i = 11 percent / 12 = .11/12 = .00916


EMI calculator : http://contentlinks.asiancerc.com/mt/tools.asp?pageSubType=emi_calculator


Do the calculation yourself to get better understanding.

Q. How much benefit we get by increasing the Tenure of the Loan. Considering a Loan of Rs 30 Lacs at 12% interest rate.

Ans: The difference in EMI value is not very significant compared to the change in tenure and at one stage its almost of no gain to increase the tenure. To prove this argument i would like to present an example.

I am listing down the EMI value for different tenures from 10 years to 100 years.
Check the difference in EMI when tenure is increased by 5 years.
Loan Amount 30 Lacs taken on 12% interest rate.

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Tenure EMI
==============
10 43041
15 36005

20 33032

25 31596

30 30858

35 30466

40 30254

45 30139

50 30076

55 30042

60 30023

65 30012

70 30007

75 30003

80 30002

85 30001

90 30000

95 30000

100 30000

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What it tells us is that it's almost useless to extend the tenure after some time.
So better pay off your loans as soon as possible.


Few more EMI Calculator
http://www.icicibank.com/Pfsuser/loans/homeloans/emicalculator.htm

http://www.ucobank.com/EMI_calculator.htm