Know How to check if your Housing Loan EMI is calculated correctly

Most people make use of loans to buy a car, purchase a home, for higher education or other personal reasons. Loans also help us achieve essential life goals even with increasing inflation.

Equated monthly installments or EMIs is a part of the repayment of the loan. It is a fixed amount payable each calendar month by a borrower to a lender on a defined date.

It is part of the equally divided monthly payment made to clear an outstanding debt within a defined period of time.

The EMI is composed of two elements: the principal and the interest. The principal is charged against the amount of the loan which one has availed while the interest is paid as a cost of the loan. This interest is owed either on the full sum of all EMIs or on the outstanding sum of the principal remaining to be paid.

Initially, the interest component is the principal part of the EMI payment. As we move through the term of the loan, the portion of interest repayment decreases, and the contribution to the principal repayment increases.

The EMI for a loan has three main aspects to it:

1) Loan amount – That is the total amount that a person borrowed.

2) Interest rate – This is the interest rate charged on the amount borrowed.

3) Loan term – This is the predetermined time-frame for loan repayment between the borrower and the lender.

Two methods of calculation:

1. Process Flat Rate:

In the flat-rate system, interest is only charged on the cumulative amount of the loan, irrespective of the principal amount you have already paid back.

The formula to calculate EMI using the flat rate method would be:

EMI = (Principal + Interest)/Period in Months

2. Reducing Balance interest Methods

As per the reduced EMI calculator, interest on the remaining or outstanding balance of the value of the loan is often charged after having repaid a certain value of principal per month. In this case, the EMIs remain the same but the interest factor in the EMI continues to decrease each month.

The EMI payment is directly proportional to the size of the loan and interest rates which ensures that the EMI on the loan often increases with an increase in the size and interest rate. However, the EMI is inversely proportional to the loan tenure, meaning that although the amount of interest charged increases with longer tenures, the EMI payments decrease if the loan is repaid over a longer period of time.

The formula to calculate EMI using reducing balance method is:

EMI =

P x {[R x (1+R)^N] /[(1+R)^N-1]}

P = Principal Loan Amount

R = monthly rate of interest

N = loan duration in months or number of monthly instalments

This is the most commonly used method for calculating EMIs.

Another easy way to calculate is to use online calculators. You can check this here:- Housing Loan EMI Calculator to find the EMI.