So, as a borrower, you may just be keen to secure a personal loan for its easy access to funds when you need them most. So, you typically look at whether you can afford the monthly Equated Monthly Instalment (EMI) and get your loan approved.
Now think about it: You may be unaware of the bigger financial implications of the amount you owe over the loan period. This lack of awareness may result in making unwise financial decisions, and can affect your budget now and in the future.
A Personal Loan EMI Calculator is an online tool to calculate the EMI amount a borrower has to pay every month to repay the loan. Typically, an EMI calculator is used to calculate EMI and interest as a function of principal, interest rate, and tenure of the loan. But these calculators are commonly used to calculate the monthly EMI.
In this comprehensive personal loan EMI calculator guide, we explain how personal loan EMI calculators are not only useful for calculations. We also share some tips on how you can use them optimally to make sensible loan decisions.
Table of Contents
What is the importance of personal loan EMI calculators?
Personal loan EMI calculators can be used strategically to plan your loan repayments. They can be used to assess your loan options before you borrow, as well as provide valuable insights that can help you before applying for a loan.
Whether you are remodelling your home, paying for medical bills, or any other personal expenses, you need to know how much you will need to pay back every month. Knowing how much you have to spend on a monthly basis is just step one. The better use of using an EMI calculator is knowing how much interest is being charged, how the total amount due will vary as you change the tenure of the loan, and now that you know all this, how you can use this knowledge to negotiate the final terms of the loan and payment date for the best possible deal.
Understanding the personal loan EMI calculator and its components
Generally, all the EMIs calculated by the EMI calculator are divided into two parts: principal and interest. In the first few years of the loan, your EMI primarily goes towards the interest. It does not pay back your actual debt. For a ₹4 lakh loan at 16% for 4 years, your first EMI is around ₹11,336. In the first few years of the loan, you pay more interest and less principal. So in the initial months, most of each EMI is used to pay the interest, and the part for the principal keeps growing with time.
This is useful when you make prepayments. Prepayments in the first two years save you more interest than those in subsequent years, when a larger part of the EMI is going towards principal anyway.
Know what your interest payment is
The EMI calculator displays the total interest payment, a large amount that you may not pay attention to. For example, if you borrow ₹5 lakhs at 18% annually for a 5-year term, then you pay ₹2.62 lakhs as interest. You’re paying to receive 7.62 lakhs of value for taking money now (₹5 lakhs).
Now compare this interest cost to your loan purpose. This might be worth it for medical treatment or education, but not for a holiday or an electronic toy.
Read more: Know how to assess various borrowing categories in ‘Smart Ways to Use Personal Loans for Financial Needs’ to ensure your personal loan is a solution and not a financial burden
How to effectively use an EMI calculator for a personal loan?
With only a preliminary understanding of an EMI calculator, most borrowers input three values on the calculator. They typically include: the loan amount, interest rate, and tenure. They then see an EMI and think they are done. However, to get the best out of EMI calculators, you will have to play around with various combinations even before you apply for personal loans.
Here are some useful pointers to use the online personal EMI calculator to your advantage:
1. Play with different tenures
For the same loan amount, compare 3-year, 4-year or 5-year tenures. Strike a balance between affordable EMIs and total interest payable. Quicker tenures cost less, but higher EMIs.
For instance, for a loan of ₹3 lakhs at 15% for a 3-year loan tenures = ₹10,400 EMI with ₹74,400 total interest. Compare that for the same loan of ₹3 lakhs with the same interest rate for 5 years. This becomes EMI of ₹7,100 and total interest of ₹1.26 lakh. With this knowledge, you could select based on cash flow.
2. Play around with different interest rates
Use rates 2-3% higher and 2-3% lower than the rates displayed to see the effect. This allows you to determine if higher credit scores and/or negotiations are worth it.
3. Stress-test using the EMI calculator
Try different scenarios using the calculator. What if you lose 20% of your salary? What if your health deteriorates and you need to spend extra on medical costs? Use these examples to check if the EMI you select is manageable in times of crisis.
Compute your debt-to-income (DTI) ratio with the additional EMI. Lenders usually prefer this ratio to be under 40%. However, for your own peace of mind, if you keep it below 30%, then you can keep some buffer for emergencies.
4. Calculate the borrowing buffer
Be sure to factor in 10-20% extra than what you would need to account for processing fees, GST, etc. If you need Rs 2 lakhs upfront, calculate for Rs 2.2 lakhs.
5. Floating vs flat rates
If a lending institution offers floating rates, opt for calculators that demonstrate this. Don’t assume all loans are calculated on flat rates. Keep in mind that a 16% loan dropping to 14% in the second year has different EMIs than a flat rate 15% loan. This is true even if the averages are comparable.
6. Consider prepayment and prepayment penalties
Run the numbers for prepayments of say ₹25,000-50,000 from bonuses or savings each year. Research what prepayments do to the time period and total interest payments. But check the penalties charged by the lender for prepayments. Calculate what would happen if you missed a couple of EMIs due to job loss or medical emergency. Now you need to have contingency plans for the penalties and the impact on your overall loan amount.
Conclusion
An EMI calculator is an online financial calculator that gives you some valuable insights beyond the monthly EMI amount. It provides you with additional insight into the cost of borrowing. This helps you get a realistic comparison of the different scenarios and make informed decisions that you can afford.
Remember, experiment with multiple loan amounts, loan tenure and interest rates before taking a personal loan. Once you have an idea of the various options, you can use the information you have gathered to negotiate for a better deal, plan your finances accordingly and ensure the personal loan you have taken is improving your financial situation and not burdening you in the future.
Shriram Finance offers personal loans at attractive interest rates with various loan tenures. Click here for more details on our personal loan interest rates and other terms & conditions.
FAQs
1. Is the EMI calculator inclusive of processing fee, GST and other fees?
GST, insurance, processing fee, etc., are generally not factored in most personal loan EMI calculators. For these reasons, we recommend that you add some buffer (10%-20%) to your borrowing amounts in the input in the calculator.
2. Will an EMI calculator be able to tell me how much I will save if I prepay my personal loan?
Yes, if the calculator has a prepayment option, it allows you to know how making a prepayment annually will affect the time you have your loan (tenure) and interest cost. But check for prepayment penalties charged by the lender to see how effective your prepayments are.
3. Will my personal loan EMIs be fixed throughout the loan tenure or will they increase?
Your personal loan EMIs are likely fixed in the case of fixed-rate loans.
4. When I am swamped with personal loan EMIs, how can I manage my EMIs and expenses?
It is advisable to have a good budget and seek advice from an expert to restructure or consolidate loans to manage your personal loan EMIs.
5. Should I apply for a personal loan from several lenders or a single lender?
The best practice when it comes to applying for personal loans is to perform adequate research. Then, you shortlist a lender best suited for your needs. Apply for a personal loan to a lender that offers loan terms suited to your income and credit history.