A Personal Loan can help you fulfil your life dreams with ease. These could be a gala wedding, or an exotic vacation, or both! Non-banking financial companies (NBFCs) offer such Personal Loans. You can enjoy those special moments and repay the loan in easy equated monthly instalments (EMIs). But first, it is important to understand the EMI calculation. You can plan your finances accordingly. Use the online EMI calculator. It will give you a fair idea of how your Personal Loan EMI is calculated. The calculator is available on the website of most NBFCs that offer Personal Loans. Browse through them and you can choose the best option that fits your budget.
Breaking up your EMI
EMIs help you repay the loan in parts. Your EMI has two components: the principal and the interest. The lender will give you the EMI chart. It will show the principal and the interest amount separately for every EMI for the entire loan tenor.
The detailed chart will show you that the interest component is higher in the initial EMIs. It will go down as you repay the loan. The principal component is lower in the early EMIs and it keeps increasing as the loan matures. You need to keep track of the principal amount when you opt for a pre-closure. But don’t worry—an EMI calculator or the EMI chart can help you keep track of this.
Varying Interest Rates
The interest rate applied to each Personal Loan varies from case to case. The lender decides on the interest rate after considering several criteria:
- Salaried vs. Self-employed
A salaried person can pay the EMI on time as s/he receives a salary every month. The cash flow for a salaried person is likely to be more stable compared to that for a self-employed person. Most lenders are aware of the risks of lending money to a self-employed person. There may be a risk of default on a few payments in certain months due to the lumpy / uneven nature of cashflows. This is why the interest rates applied on a Personal Loan for a salaried employee are often lower than those for a self-employed person.
- Organisation
In terms of cash flow, bigger organisations are more stable than small and medium-sized ones. A stable cash flow ensures that their employees receive their salary on time. Timely salary credit helps employees pay their EMI on time. Hence, the organisation you work for matters.
Each lender maintains a list of the risk profile of organisations. The lender will ask you for your employer details and decide on the interest rate accordingly.
- CIBIL score
Your CIBIL score indicates your credit discipline. The TransUnion CIBIL maintains it. It calculates the score based on your past and existing loan accounts. The higher the score, the higher is the probability that you would get a Personal Loan at a lower interest rate. NBFCs or Banks will check your CIBIL score before granting the loan and deciding on the interest rate. Two persons may work for the same organisation, have similar work experience, salary, loan tenor, and principal amount. But they if they have a different CIBIL score, a lender may decide on different interest rates for them.
What you need to calculate in the EMI
So, to calculate the EMI, it is important to know the loan tenor, the interest rate, and the principal amount. The tenor affects the interest rate, too. The longer the tenor, the lower is your EMI. That is because you can repay the principal in more instalments along with the interest. You can play with each of these factors to figure out how much EMI or loan you can afford to take.