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Home Loans and EMI

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Home Loans and EMI

A loan taken for home purchase has got importance but it indeed is a very costly affair. So, the person taking the loan should understand the amount to be paid and when he has got a chance to transfer loans and take advantage.

The formula for calculating the EMI (Equated Monthly Installments)

EMI = [P x R x (1+R)^N]/[(1+R)^N-1],

P is the loan amount or principal,

R is the interest rate per month if the loan is taken @ 10 % this rate is per year then it should be converted per month. For the above 10/ (12 x 100)

N is the number of monthly installments.

For instance, Rakesh has purchased a car worth Rs. 5.95 lakh in 2010. He made a down payment of Rs. 1.5 lakh and took an auto loan for the rest of the amount at 12% interest per annum for four years. At present, he is paying an EMI of Rs. 11,700 per month. However, he has no way of knowing if the amount is correct or not. To do so, he can use the above formula and find whether he is doing correct payments.

USING EXCEL

One of the ways of calculating the EMI is by using the Excel sheet. In Excel, the function for calculating the EMI is PMT. This has three variables – the rate of interest (rate), the number of periods (n per) and, the value of the loan or present value (pv).

The formula which you can use in excel = PMT (rate, nper, pv).

EMI of Rakesh by using the above formula.

It must be noted that the rate used in the formula should be the monthly rate, that is, 12%/12 = 1% or 0.01.

The number of periods represents the number of EMIs = PMT (0.12/12, 4*12, 445,000) = 11,718

Once the EMI calculation is done, it is easy to know if the amount being paid is correct or not.

So, this calculation is to be understood properly before accept the terms and conditions of a loan. If an installment cheque gets bounced then an extra amount of Rs. 500 has to be paid and this recording affects CIBIL score.

This can be used even to decide to transfer home loans. Many times falling interest rates tempt the individuals to transfer loans from one bank to other. Normally, as RBI controls the monetary policies every bank should have the same deposit and interest rates. In reality, certain banks refrain from passing the benefits to customers. Due to this reason interest rates vary from one bank to another.

As the calculations are done every individual should add up the extra charges incurred for transfer before he decides to switch over to another lender.

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