When looking for quick financing options, personal loans often come into our minds due to its unsecured nature, no end use restriction and quicker disbursals. While these loans are easy to avail, their applicants need to factor in their EMI affordability and the optimum loan tenure before making the loan application. The best way to find your optimum loan tenure or EMI is to use a personal loan EMI calculator. Following are a few more points elaborating on the benefits of using a personal loan EMI calculator before applying for a personal loan.
1. Quick and Accurate Calculation of EMIs
The mathematical formula for calculating EMI on a personal loan is [P x R x (1+R)^N]/[(1+R)^N-1], where ‘P’ is the Principal Amount; ‘R’ is the Rate of Interest and ‘N’ is the Tenure (in months). Prospective personal loan applicants can use this formula to estimate EMIs on their personal loans manually. However, such manual calculations can be complex and time-consuming. Prospective personal loan applicants could be at it for hours if it were to be done repeatedly for different sets of values. Also, with manual calculations there is always a chance of making errors, thereby, making it even more important to use a personal loan EMI calculator. Using a personal loan calculator for EMI calculation will not only help prospective personal loan applicants avoid complex mathematical calculations but also generate accurate results in just a second.
2. Estimated cost of borrowing
Most personal loan EMI calculators not only calculate the EMI amount but also the total interest payable and the total loan amount payable, i.e. the sum of principal amount and interest payable. This helps borrowers to estimate the total interest cost of the loan. However, when considering the cost of borrowing, borrowers should remember to factor in the processing fee, which also contributes to their overall cost of the loan. If the borrower is planning to prepay/foreclose the loan, then prepayment/foreclosure charges should also be considered when evaluating the total cost of borrowing. However, the borrower in such cases should use APR calculator to find the overall cost of borrowing after factoring in processing fee, documentation charges or other related fees and charges.
3. Determine Optimum Tenure
Tenure is one of the major factors that influences personal loan EMI amount and the total interest cost. Longer tenure results in lower EMI, which increases borrowers’ EMI affordability and also allows them to accommodate more of their planned and unplanned expenses besides their monthly contributions towards their crucial financial goals. Shorter loan tenure, on the other hand, increases the EMI payments, allowing borrowers to close their personal loans faster. While longer tenure increases the overall interest payout, a shorter tenure reduces it. For determining the optimum tenure for your personal loan, borrowers can calculate personal loan EMI for different sets of values using the EMI calculator and then, take a decision accordingly.
4. EMI Affordability
Lenders prefer approving personal loan applications of those having total EMI obligations, including EMI of the proposed personal loan, are within 50-60% of their net monthly income. Using Personal Loan EMI Calculator will give the prospective borrowers an estimate of their EMIs. This will allow applicants exceeding the aforementioned limit to take steps to reduce their EMIs and increase their chances of personal loan approval. One of the ways to reduce your personal loan EMI is to opt for longer loan tenure. Choosing longer tenure will reduce the monthly payouts and thereby, contain borrower’s total EMI obligations within 50-60% of their net monthly income.
5. Financial Planning
The EMIs for fixed rate personal loans remain the same throughout the loan tenure, which helps prospective borrowers in planning for their finances with higher certainty. The EMIs of floating rate personal loans, on the other hand, may change during the loan tenure due to change in the linked external benchmark rates. However, in such cases too, prospective borrowers can use a personal loan EMI calculator to get a rough idea on their loan EMIs and keep a provision in their monthly budget to accommodate the increase in the personal loan interest rates, if need be.
When planning for their loan repayment, prospective borrowers must avoid compromising their monthly contributions towards emergency funds and crucial financial goals. As doing so may force you to liquidate your investments and/or avail a new loan at higher interest rates to deal with financial exigencies, if any, or to meet the unavoidable financial goals.
Note that your emergency fund should cover your unavoidable expenses including your utility bills, rent, existing loan EMIs, SIPs, insurance premiums, etc. for at least 6 months. Thus, prospective borrowers should also factor in their estimated personal EMIs towards their emergency funds. This would save them from the risk of loan defaults during financial emergencies or periods of loss of income arising from job loss, illness, disability, etc. Delays or defaults in your personal loan repayment would not only attract penal interest and other related charges, but can also adversely affect your credit score, which would further impact future loan or credit card eligibility.
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