In today’s world, where loans have become the go-to option for most people to purchase big-ticket items like homes, cars, and electronic appliances, understanding equated monthly installments or EMI breakdown has become crucial. EMIs are the fixed monthly payments that borrowers make towards their loans to repay it over a pre-decided loan tenure. These payments comprise both the principal and interest component of the loan amount. However, many borrowers find themselves confused with the terms like interest rates, loan tenures, and EMI calculations, often leading to financial stress. In this article, we will break down these terms and explain the inner workings of EMIs to help you make an informed decision while taking a loan.
What is EMI Payment?
EMI Payment is a monthly payment towards a loan that is equated over a period. It comprises both the principal amount borrowed and the interest charged on that amount. The EMI amount is calculated based on the loan amount, interest rate, and loan tenure. As the principal amount is repaid over the loan tenure, the interest amount charged on that amount decreases steadily, lowering the EMI amount over time.
For example, let’s say you borrowed INR 1 lac at an interest rate of 10% per annum for a loan tenure of 3 years. In this scenario, your EMI payment would be INR 3,242, comprising the principal amount and the interest charged on that amount, which would be INR 21,771. The total interest payable on this loan would be INR 21,771 x 3 = INR 65,313, making the total amount repayable at the end of the loan tenure to be INR 1.65 lacs.
Bajaj Finance EMI Payment Rules
Bajaj Finance is one of the leading non-banking financial companies (NBFCs) in India that offer various loans like personal loans, home loans, business loans, and more. Their EMI Payment Rules are no different than other lenders and are governed by the Reserve Bank of India’s (RBI) regulations. The RBI has mandated all lenders to provide the loan’s full EMI breakdown, including the principal and interest components, to the borrowers, enabling them to make an informed decision while taking a loan. This breakdown must be calculated based on the reducing balance method, where the interest amount is charged on the principal outstanding at the end of each month.
Bajaj Finance also offers loan prepayment options, where the borrower can repay the full or part of the loan amount before the end of the loan tenure. However, NBFCs are allowed to charge a prepayment penalty up to 2% of the outstanding loan amount if the borrower repays more than 25% of the outstanding loan amount during the first part of the loan tenure. If the prepayment is made after that, there is no penalty.
Understanding the Inner Workings of EMIs
To understand how EMIs work, let’s take a deeper look at the three primary factors that determine the EMI amount- loan amount, interest rate, and loan tenure.
- Loan Amount: The loan amount is the money that you borrow from the lender, which is also known as the principal amount. The larger the loan amount, the higher your EMI amount would be. Therefore, it is essential to borrow only as much as you will need and not more than that.
- Interest Rate: The interest rate is the amount charged by the lender on the principal amount borrowed. The higher the interest rate, the higher your EMI amount would be. Therefore, it is crucial to compare the interest rates offered by different lenders to choose the one that suits your repayment capacity the best.
- Loan Tenure: The loan tenure is the time period within which you need to repay the loan amount. The longer the loan tenure, the lower your EMI amount would be. However, a longer loan tenure also means paying a higher amount of interest over time, making the total amount repayable much higher. Therefore, it is essential to choose a loan tenure that matches your repayment capacity.
How is EMI Calculated?
EMI calculation can be done manually or by using an online EMI calculator. The formula to calculate EMI manually is:
EMI = [P x R x (1+R) ^ N]/ [(1+R) ^ N-1]
P= Loan amount,
R= Rate of interest per month (annual rate/12),
N= Loan tenure in months.
For example, if you borrowed INR 5 lacs at an interest rate of 10% for a loan tenure of 5 years,
P= INR 5,00,000,
Therefore, EMI= [500000 x (10/12) x (1+(10/12))^60] / [(1+(10/12))^60-1] = INR 10,607.
This means you have to pay INR 10,607 per month towards your loan for 5 years.
Alternatively, you can use an online EMI calculator, which is readily available on the lender’s website. All you need to do is enter the loan amount, interest rate, loan tenure, and click on the calculate button. The calculator will provide the EMI amount breakdown and total interest payable on the loan, making it easier for borrowers to understand and plan their finances better.
In conclusion, understanding EMI breakdown is essential for anyone who is planning to take a loan. It helps in making an informed decision while choosing the loan amount, interest rate, and loan tenure, enabling borrowers to manage their finances better. Moreover, lenders like Bajaj Finance offer transparency in their EMI calculations, enabling borrowers to know the complete EMI breakdown upfront, helping them in planning their finances better. Therefore, before taking any loan, it is crucial to read and understand the loan’s terms and conditions and calculate the EMI amount breakdown using online EMI calculators to make an informed decision.