With 24/7 personal loan apps, the process from verification to disbursement is now at your fingertips. But repayment varies from applicant to applicant. Digital lenders consider multiple factors in your credit profile to estimate your eligibility and calculate your EMIs based on the amount you apply for and your CIBIL score. The guide below elaborates on how EMIs are calculated to begin with and how you can get better interest rates.
How Does a Personal Loan EMI Work?
An Equated Monthly Instalment (EMI) is a fixed sum you repay to your lender each month until you clear the entire loan. Each of the EMIs you pay is divided into two parts:
Principal Component: The amount of money actually borrowed by you.
Interest Component: The amount that the app charges you for lending you the money.
To calculate this, the app processes three vital pieces of information:
Principal (P): The total amount of money which you wish to borrow.
The interest rate (R): The annual interest rate expressed on a monthly basis.
Tenure (N): The total number of months over which you will repay the loan.
How Does The Tenure You Choose Change The Math?
The longer the loan term, the lower your monthly payments and the greater the total cost of the loan. For example, consider a loan of ₹5,00,000 at an annual interest rate of 12%.
If you opt for a term of 36 months (three years), your monthly EMI would be ₹16,607; the total interest payable over the loan term would be ₹97,858, making the total amount you repay ₹5,97,858.
If you select a longer term of 60 months (5 years) for the same loan, your monthly EMI will drop considerably to ₹11,122.
Although this reduces your monthly cash-flow pressure by more than ₹5,400, the fact that you are extending the term means that the total interest you will have to pay amounts to ₹1,67,333, bringing the total amount you will have to repay up to ₹6,67,333 and thus adding ₹69,475 more in interest than in the case of the 3-year plan.
How To Use the App's Calculator?
If you also want to calculate your EMI plan, follow these steps.
Enter the amount you would like to borrow: you can do this by dragging the slider or by typing in the exact sum of money you need.
Enter the interest rate that is given in your app profile, as personal loan apps usually set this rate according to your credit history.
Choose Your Tenure: Use the options for different months to see how it affects your payments.
Review the breakdown: See your monthly EMI, total interest, and total amount to be repaid at a glance.
What To Do To Get Better Interest Rates For Yourself?
Since personal loan apps calculate your interest rate based on your financial situation, your monthly payment isn't fixed across lenders. If you wish to use the calculator to obtain a lower and more affordable EMI, you should work on improving these important financial factors before you apply.
To improve your credit score: if your credit score is above 750, the app will recognise you as a low-risk borrower and offer you the lowest available interest rates.
Pay off any existing minor debts: settle the outstanding balances on your credit cards or other smaller active loans in order to boost your debt-to-income ratio prior to applying for a new loan.
Demonstrate a steady income: Keep a regular schedule of documented sources of income since a consistent cash flow gives lenders assurance that you will be able to comfortably meet the fixed monthly automatic withdrawals
Some Tips You Can Follow As a Borrower
Before you decide to apply for a loan, there are some ways you can follow to make your credit profile look a lot healthier.
Follow the 40% Rule: Make sure that the total amount you pay each month on debts (including the new loan) does not exceed 40% of your net monthly income.
Go beyond the EMI: While the calculator gives you an estimate of your basic payment, be aware of any processing fees (which are typically deducted upfront from the amount of the loan at a rate of 1% to 5%) and any prepayment penalties should you decide to pay off the debt early.
To protect your credit score: using the calculator as many times as you like will not result in a hard credit inquiry, so it will not affect your credit score.
Summary
Before you apply for a loan, it is always better to calculate the EMI amount beforehand so it becomes easier for you to plan out your budget once you start to repay your monthly EMIs.
If you want to borrow a personal loan but also want to calculate your EMI for the amount you need, credible platforms like Bajaj Finserv App are a great option to pick, offering loans up to ₹55 lakh and an in-app EMI calculator feature. The whole process of a digital loan is completed online, and the amount is disbursed within 24 hours post-approval.
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