Benefits of Calculating EMI before applying for loan

When you are looking to take a loan for any reason, one of your prime concerns would be the EMI that you will have to pay. It is an important part of the decision, as EMI has to be paid month after month for years. So you don’t want to get stuck in a loan repayment schedule that is unmanageable for you. Isn’t it?

It is for this very reason that experts suggest that you calculate your loan EMIs even before applying for a loan. Now even though the loan amount you need depends on your requirement, you need to be aware of your repayment ability. You just can’t take a loan with EMI of Rs 25,000 when your monthly income is Rs 30,000. It’s not feasible or sensible.

So knowing your loan EMIs beforehand helps you better plan your finances. You will get a fair idea about whether the loan you wish to take is even feasible or not, given the quantum of EMI in comparison of your monthly income. Lenders generally have a thumb rule that total of all loan EMIs (be it a personal loan, home loan, car loan, used car loan, etc.) should not be more than 40% of your income.

Now how to calculate the loan EMIs?

The answer is EMI calculators. These simple-to-use online EMI calculators only require 3 inputs:

·      Loan Amount

·      Interest Rate

·      No. of Months

As soon as you provide these data points and press the submit/calculate button, the EMI calculator will tell you the exact loan EMI, total interest to be paid and total amount you need to pay.

Now if play with the interest rate or tenure in the calculator, you will understand that your loan EMIs decrease as the tenure increases. On the other hand, the EMIs increase with increase in interest rates.

See the whole idea of this exercise it to find out your personal EMI threshold -an EMI that you can comfortably pay for the full loan tenure. You can try different combinations of loan amount to see what EMI amount actually suits you. This reverse trial-and-error approach will tell you exactly how much you should borrow. So even when a lender might be ready to lend you an amount whose EMI is say 35% of your income (within the 40% thumb rule), it’s possible that you are only comfortable earmarking 25% of your income for EMIs.

So make sure that you try to get atleast some idea of the EMI that you will have to pay for the planned loan amount. And you can do this easily with an online EMI calculator.

Author: Sneha R