Loans have become an integral part of everyone's
life today and help us achieve some important life goals. Be it buying a car,
buying a home or affording kids overseas education, loans play a vital role in
our life.
However, when we talk about loans, the most
important word associated with it is EMI. EMI, which stands for equated monthly
installment, is the monthly amount payments we make towards a loan we
opted for. "EMI payments include contributions towards both principal and
interest on the loan amount. The interest component constitutes the major
portion of the EMIpayment in the initial stages. As we progress along the
loan tenure, the portion of interest repayment reduces and contribution towards
the principal repayment increases," says Nitin Vyakaranam, founder and
CEO, arthayantra.com, a leading online financial planning firm.
Loan Amortization Schedule
Loan amortization schedule is a tabular
presentation of the loan with the EMI payment. It shows the break up between
the interest component and principal component of a particular EMI payment.
This schedule helps the investor to examine how the loan is being paid and how
much outstanding loan is left to be paid. It contains information like time
period of payment, EMI, interest, principal payment and the outstanding loan.
In case the loan bearer wants to foreclose the loan or wants to refinance his
loan, this schedule is very helpful in such cases.
What are the factors affecting
an EMI?
The EMI of a loan depends on three factors:
Loan amount - This stands for the total amount that
has been borrowed the individual. Interest rate - This stands for the rate at
which the interest is charged on the amount borrowed. Tenure of loan - This
stands for the agreed loan repayment time-frame between the borrower and the
lender.
How is EMI calculated?
The mathematical formula to calculate EMI is: EMI =
P x r x (1 + r)n/((1 + r)n - 1) where P= Loan amount, r= interest rate,
n=tenure in number of months.
For instance, the EMI for a principal amount for Rs
1 lakh, 10% interest rate and 12 months tenure is shown in the following
table:
Principal
Amount
|
100000
|
Interest
rate
|
10%
|
Tenure in
number of months
|
12
|
E M I
|
8792
|
Considering the above mentioned three governing
factors, the EMI payments are directly proportional to loan amount and interest
rates and are inversely proportional to the tenure of loan. The higher the loan
amount or interest rate, the higher is the EMI payments and vice versa. In case
of tenure of loan, though the amount of total interest to be paid increases
with the increase in tenure, the EMI payments decrease with the increase in
tenure.
Reasons for varied EMI
payments
The other major factor which determines the EMI
payments is the type of interest on the loan. In case of fixed rate loans, the
EMI payments remain constant during the tenure. In case of floating rate loans,
the interest rates vary based on the prevailing market rates. Hence, the EMI
payments also vary whenever there is a change in the base rates.
The other factor which effects the EMI payments is
the pre closure or partial payments made towards the loan. Any partial payments
made towards the loan are deducted from the principal amount of the loan. This
results in reduction of total interest that is to be paid. "Generally an
individual who is making a partial payment will be given an option to keep the
tenure constant or keep the EMI constant. If one opts for keeping the tenure
constant, the monthly EMI payments will be reduced. Similarly, if one opts for
keeping the EMI constant, the tenure of the loan will be reduced," says
Vyakaranam.
Source : http://economictimes.indiatimes.com/
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