When venturing into the world of business, securing adequate funds is essential for growth and success. Business loans are a popular financing option for entrepreneurs and small businesses, but before availing of one, it is crucial to understand the financial implications. One of the key aspects of any loan is the EMI (equated monthly installment). In this article, we will explore what an EMI is, how it is calculated, and the importance of using an EMI calculator to plan your finances smartly.
What is an EMI?
EMI stands for equated monthly installment. It is a fixed amount that borrowers need to repay to the lender on a monthly basis until the loan is fully repaid. An EMI consists of both principal and interest components, spread over the loan's tenure. As time progresses, the interest component decreases, while the principal component increases in each EMI payment.
How is EMI calculated?
The formula used to calculate the EMI is as follows:
EMI = [P x R x (1+R)^N] / [(1+R)^N-1]
Where:
EMI = equated monthly installment
P = principal amount (the loan amount borrowed)
R = monthly interest rate (annual interest rate divided by 12)
N = Loan tenure in months
Using this formula manually can be complex and time-consuming, especially when considering different loan amounts, interest rates, and tenures. This is where an EMI calculator comes to the rescue.
