The full form of EMI is Equated Monthly Instalment. It is a fixed payment made from the borrower’s end to the lending institution until the business loan amount is fulfilled. EMI comprises both the interest on the loan and the principal loan amount borrowed. The cumulative sum of the principal and the interest amount is then divided by the tenure of the business loan to generate the EMI due every month. Surprisingly, the percentage of interest in the ‘fixed’ EMI gradually dwindles while the proportion of principal increases after the first few months.
Working of an EMI Calculator
Business loan EMI calculator is very easy to use and requires users to input some variables before the formula is applied, to generate the EMI instantly:
- Loan Amount: Loan amount is the amount borrowed by small business units from business loan providers. The rate of interest on the loan is calculated on this amount. High loan amounts generally lead to high EMIs.
- Interest: This rate determines the rate at which interest is calculated on the loan amount. The type of interest decides the EMI. Interest rates can be of floating or fixed.
- Tenure of Loan: This is the total time duration in which the loan amount has to be repaid. The EMI increases with short tenures.
The formula for formulating EMI is:
EMI = [P x R x (1+R) ^ N] / [(1+R) ^ (N-1)]
P = Principal amount
R = Rate of interest
N = Loan Tenure)
Benefits of EMI Calculator
- Convenience: EMI calculators, being an online feature, are very convenient to use. They are a single step away from our hands. With just the necessary three variables, the EMI amount can be calculated easily.
- Accuracy: EMI calculators minimise errors which are bound to happen if the equivalent calculations are carried out manually. They also save the borrowers fro, unnecessary problems in planning.
- Specificity: There are numerous kinds of EMI calculators depending on the type of loan availed by the business entities which come with inbuilt specializations, catering to the particular loan type.
- Graphic Representation: Online EMI calculators display graphic notations of the loan paid, remaining amount, etc. which makes it easier to visualize facts and figures, and take the necessary course of action.
- Decision Making: EMI calculators give the added important advantage of helping the MSMEs of judicious decision making. These calculators can be used to predict the EMI payable against a particular loan amount and other predefined attributes. MSMEs can avail this feature before applying for business loans to decide the optimum loan amount, which would lead to the most economic EMI amount without burning a hole in their pockets.
Factors affecting EMI:
- Change in Tenure: Changes in loan tenure can have adverse effects on the incumbent EMI. Shorter tenures lead to high EMIs and vice versa.
- Loan Prepayment: Prepayment of the loan amount generally incurs a penalty on the borrower. Prepayment is allowed only after a certain period lapse as mentioned in terms of the lending institution, such as six months.
- Flexible Repayment: Variable loan repayment features are available in some NBFCs. In step-up loan type, the EMI amount shows an upward slope over time while a step-down loan is distinguished with reducing EMI over some time.
Business loan EMI calculator has a plethora of advantages and comes with a concrete reputation among business entities going for a business loan. It comes as a saviour to MSMEs who often require services like the prediction for the best loan amount to apply for. Additionally, it saves a heck lot of time and energy by substituting the otherwise cumbersome manual power. EMI calculators are all-encompassing and inclusive of all loan types.