 Taking a personal loan for an urgent need or to fund a dream is simple  with the right tools and information. But a first-time borrower might be wary of high EMI payments. Most people are unaware of how and why they are charged a certain amount of EMI on the loan. This article explains how the EMI is calculated.

The three factors that determine the EMI

Three elements determine the loan EMI. They are:

1. The product offering and principal amount:  Principal amount is the  sum of money the lender approves against your loan application.
2. The interest rate: It is the rate at which the lender charges interest on the principal.
3. The loan tenure: It is the term over which the loan is repaid to the lender, measured in months. Monthly installment is lesser for longer tenure loans & vice-versa.

The EMI amount is computed based on the interplay between the above factors. The EMI is directly proportional to the principal and interest, and inversely proportional to the tenure.

Thus, the EMI rises if the loan tenure is small, such as in a personal loan, which has the shortest tenures across all loan products in India (not exceeding 1.5 years from loan apps).

The numbers in the EMI

This brings us to the question: ‘How is the loan EMI calculated?’ Lenders use a mathematical formula to arrive at the EMI computation:

EMI = P × r × (1 + r)n/((1 + r)n – 1); where –

P is the Principal borrowing,

r is the rate of interest,

n is the tenure measured in number of months.

However, you need not use this formula and end up with complicated calculations. The best loan apps have online EMI calculators that you can use to find out the projected EMI payment when you borrow a certain amount of money. The app also allows you to check your loan eligibility and directs you how to check the loan status once you get the disbursal.

Apply for the personal loan

By now, you are aware of how the EMI is calculated and what it could be when you take the personal loan. All that remains is to apply for the loan and get it disbursed to your account post-approval. Please follow these steps when applying over a loan app: