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Why is it Important to Calculate Personal Loan EMI Beforehand?

Why is it Important to Calculate Personal Loan EMI Beforehand?

Before applying for a personal loan, there are 3 important things one must do in order to get the best deal.

A personal loan is usually an unsecured loan that is repaid through Equated Monthly Instalments (EMIs) by the borrower to the bank over a specified period of time. Unlike a home loan or a car loan, no collateral or security is required to obtain an unsecured personal loan. Banks in India offer multi-purpose personal loans at competitive interest rates starting from as low as 10% p.a. for a loan tenure of 12 to 60 months. Personal loans can be used to meet any financial contingency that one may face - medical emergency, wedding, vacation, home renovation, etc.

Any salaried or self-employed person aged between 21 to 65 years with a good credit score and a steady income can apply for a personal loan. For applicants with a credit score of 750 or above, there is a higher chance of personal loan approval. He or she must have a minimum annual income of Rs.2 lakh and a minimum work experience of 2 years in the same field. Before applying for a personal loan, visit the bank website to check your personal loan eligibility so as to avoid loan rejection. Multiple rejections can have a negative impact on your credit score.

Before applying for a personal loan, there are 3 important things one must do in order to get the best deal:

  • Compare various personal loan offers across the top banks and choose one with a low interest rate and flexible repayment options.
  • Check your personal loan eligibility online so as to ensure you have higher chances of loan approval.
  • Use an online personal loan EMI calculator to find out how much the loan will cost you monthly.

The EMI of a personal loan can be calculated using the below formula:

E = P x r x (1+r)^n/((1+r)^n – 1), where E is the Equated Monthly Installment, P is the principal loan amount, r is the rate of interest, and n is the loan tenure.

Carrying out manual EMI calculation is not only time consuming but also prone to human errors. These days, EMI calculation can be done using an online personal loan EMI calculator that is available for free on the bank website or a reliable third-party website. It is simple and easy to use - all you have to do is input 4 loan parameters into the tool and click on the ‘calculate’ button to get instant and accurate results.

The process to calculate is rather simple. Enter the principal loan amount, loan tenure, interest rate, and processing fee of your personal loan into the calculator. Click on the ‘Calculate’ button in the tool. You will get easy to interpret EMI results in the form of an amortisation table which represents the periodic loan repayment schedule. The table consists of the EMI payments, outstanding dues after each EMI payment, and interest payments. The details of the total cost of your personal loan will be broken down in easy terms for better understanding. Your loan repayment schedule will also be represented in colourful bar graphs and pie-charts for easy interpretation. The same applies to car loan and home loan EMI calculators.

Calculating personal loan EMI beforehand can help you find out the monthly cost of your loan. Depending on the monthly cost of your loan, you can create a budget to maintain a low debt-to-income ratio so as to avoid defaulting on your personal loan. No matter what type of loan scheme you choose, prior EMI calculations can help you choose a suitable loan tenure. Depending on the results, you can adjust the loan amount or loan tenure to ensure your EMI payments don’t exceed more than 50% of your income. A short loan tenure means higher EMI payments whereas a long tenure means higher interest payments.

In the case of personal loan prepayment, you can use the personal loan EMI calculator to get a revised amortisation schedule. Banks charge a prepayment penalty fee for part or full payment of the loan before the end of its tenure. Likewise, if there is a change in the floating rate of interest on your loan (usually home loans), you can use the online EMI calculator to get revised loan repayment schedules. This tool can be used any number of times for varying combinations of loan tenures and interest rates so that you can make an informed decision when choosing a suitable loan amount and repayment period for your personal loan.

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first published:January 25, 2018, 10:30 IST