The loan is an amount of money that is borrowed from a lender that is expected to be paid back with interest. The one who borrows the loan is the borrower and the lender can be an individual, bank or any financial institution. The lender pays the entire amount on behalf of the borrower. The borrower, on the other hand, pays monthly installments to the lender towards the principal amount and interest too over the amount. Interest is the cost of using someone else’s money. It is seen as a compensation to the lender who takes the risk to lend you the money in simple terms. There is a way to determine the loan interest formula for your EMI.
The amount of interest on your loan depends on three things
-The amount of loan
-The interest rate
-A time duration of the loan
A long term loan or a higher interest means that the borrower has to pay more to repay the loan. Most banks and financial institution use compound interest to determine your loan interest.
In the day of computers and laptops, an excel spreadsheet is the easiest way to calculate the loan interest formula. The loan interest formula is calculated by PMT which includes three variables, these are a rate of interest (rate), number of periods (per) and, lastly, the value of the loan or present value (PV).
EMI = PMT (rate,per,PV)
The rate of interest used in the formula should be the monthly rate
The number of EMI’s is represented by the number of periods.
The result is usually in the red or in negative which is indicative of the cash outflow of the borrower.
When using a calculator or just plain mathematics the formula for calculating EMI is as follows
EMI = [P x R x (1+R)^N]/[(1+R)^N-1], where P stands for the loan amount or principal, R is the interest rate per month [if the interest rate per annum is 11%, then the rate of interest will be 11/(12 x 100)], and N is the number of monthly installments. When you use the above formula, you will get the same result that you will get in the Excel spreadsheet.
Each EMI repays a part of the due amount i.e. the principal and the interest due on the loan amount. With the help of a loan interest formula, you can plan wisely and meet your financial needs. It’s easier to plan in advance and pay off the loan amount in due time to avoid getting into a debt trap.
