When you raise a personal loan, the first thing you want to do is to find out your equated monthly instalment or EMI. This can be computed with the help of a personal loan EMI calculator.
Let us understand how this works.
An EMI calculator ascertains the monthly instalment on the basis of interest rate and loan duration. The EMI is directly proportional to the rate of interest. This means when the interest is high, loan EMI is higher.
Conversely, when the interest rate is lower, the EMI is also lower. At the same time, loan duration and amount of EMI are inversely proportional. This means when the loan duration is short, the EMI amount is higher. And when the loan duration is longer, the EMI becomes smaller.
Let us understand with an illustration. Suppose you take ₹5 lakh personal loan. And the interest rate is 12 per cent per annum.
(Source: livemint.com/loans/personal-loan-emi-calculator)
The loan tenure can be anywhere between one and five years. If the tenure is 12 months, the EMI will be ₹44,424, as shown in the table above. Now as the loan tenure gets longer, the EMI declines.
You can stagger loan repayment
For a two-year tenure, the EMI will be reduced to almost half, i.e. ₹23,536. If you find this EMI too large to pay every month, you can stagger the loan repayment in three years or longer. For three years, the EMI will turn out to be ₹16,607. When the tenure is four years, the loan EMI will be ₹13,166.
For five years, the loan EMI will be even smaller at ₹11,122.
Now if you think you can’t afford to pay even this EMI, you will have the option to either take a smaller loan or to look for a lender that charges a lower rate of interest.
The same ₹5 lakh loan, when repaid at 10 per cent interest, needs an EMI of ₹43,957. For long-duration repayments i.e., 2, 3,4 years, the EMIs fall incrementally to ₹23,072, ₹16,133 and ₹12,681.
On a five-year tenure, the EMI for ₹5 lakh loan becomes ₹10,623.
(Note: Remember that taking a loan has its own set of risks)