How Can You Split the Principal and Interest in an EMI Loan?
Taking out a loan is a big step, and matters like these are very important. One should always be familiar with the terms used, notably EMI, principal, and interest. These factors combine to determine how much it will cost to repay the loan. Adding the principal and interest together gives the total money to be repaid.
Read ahead to find out how to split an EMI loan.
What is EMI?
An Equated Monthly Instalment (EMI) is a fixed monthly payment made by a borrower to a lender on a given date. Each month, equal monthly instalments are shared with the interest and the principal so that the loan is paid off in full over a given number of years.
Intending to finish the loan, the borrower makes a fixed payment during a set interval of time with the lender.
What Exactly is the Principal?
The initial amount of money lent to a borrower is called the “principal.” Take out an INR 550,000 mortgage to buy a house, for example, and the principal is INR 550,000. However, that is not the total amount required to be repaid. The lender must include interest to determine the actual cost of borrowing that money.
Explain the Term “Interest”
In addition to the loan, interest is the percentage charged to the borrower for borrowing money. This is often referred to as the annual percentage rate (APR). The interest is a fee paid to a lender for borrowing money and is usually calculated using an annual percentage rate. You can calculate the APR as a percentage of the loan’s total principal balance.
It is important to understand how each EMI is allocated to principal and interest repayments because many important decisions are affected by how the EMI is placed.
- Use an Excel spreadsheet to calculate the principal amount from an EMI.
The PMT function in Excel can be used to calculate the EMI value, which has the following syntax:
=PMT(RATE,NPER,PV,FV,TYPE)
For example, if you want to find the EMI value for INR 100,000 loan that is payable over 5 years (i.e., 60 monthly instalments) at a 12% p.a. interest rate, enter the following formula into a cell in an Excel spreadsheet:
=PMT(0.01,60,100000,0,0);
It should be noted that the rate used in the formula should be a monthly rate, such as 12%/12=1% or 0.01 in the example above. It’s also worth noting that the function’s final two parameters (FV and TYPE) are optional and, if omitted, are assumed to be 0.
- Separate the principal and interest elements for each month using a calculator.
Use the following formula to calculate the total interest: Principal loan amount x Interest rate x Time (aka the number of years in the term) = Interest.
For example, if you take out an INR 20,000 five-year loan with a 5% interest rate, the simple interest formula is as follows: s INR 20,000 x.05 x 5 = INR 5,000.
Factors on Which EMI Depends
a) The EMI is determined when the loan is approved and remains constant throughout the loan term, assuming that none of the factors on which it is calculated change.
b) If interest rates change, the EMI may change. It is also possible to maintain the same EMI while increasing or decreasing the loan tenure to reflect changes in interest rates or loan prepayment.
c) The EMIs are designed in such a way that the interest portion accounts for the majority of the payments made in the first few years. In later years, the primary component rises.
Tips for Reducing Interest Burden While Repaying the Loan:
a) Make sure that the principal amount is repaid as soon as possible. The lower the principal amount (due to earlier repayment), the lower the amount of interest to be repaid.
b) The borrowed party can also pay one additional EMI per year (in addition to the usual number of EMIs). This is a useful method for reducing the length of the loan and, as a result, the interest cost.
c) Choosing an EMI that one can afford through a shorter loan term results in a lower interest payment. It also increases the EMI burden. As a result, when deciding the loan EMI amount, always keep the budget in mind.
The Benefits of EMIs
- Because the monthly payment is already known and broken down over the loan term, the EMI option will not be a financial burden and will allow the borrower to make other investments.
- EMIs calculators will allow one to calculate monthly outflow based on the principal amount, the interest rate charged, and the period. It is simple to plan for other expenses.
Negative Aspects of EMIs
- In addition to the interest cost, the lending party may charge extra in the name of the processing fee.
- Missing an EMIs can have serious effects. The lender has the legal right to take over the mortgaged asset if failed on payments.
Conclusion
The principal is the loan’s original amount, and interest is the added charge one pays to borrow it. The principal and interest determine the total cost of a loan and the length of time it will take to pay it off. With this, one can go forward and make sound decisions regarding financial management to fulfil the desires.
FAQs
1) Can people with poor credit get loans?
Yes. One does not need to have excellent or even good credit to obtain a loan. Credit-builder loans are intended for people who have no or little credit history. People with bad credit can also obtain loans.
2) Does EMI include interest and principal?
Yes. EMI consists of two terms: principal and interest. EMI is the payment the borrower makes as a repayment of the sum borrowed.
How can we use the EMI Calculator?
3) The following is the exact EMI formula for calculating EMI amounts:
(P R/12) [(1+R/12)N] / [(1+R/12)N-1] = EMI
P = principal (the amount borrowed);
R stands for Annual Interest Rate.
N is the number of monthly instalments.
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