ajeeb

I have been doing some research on home loans of late.
I am really confused about the way banks calculate EMI.
Let me explain this with an example:
Say I want a loan of 10 lacs and the interest rate is 9.25% p.a (fixed) for 20 years. So, by calculation the total amount i need to pay shall be:
Principal: 10 lacs
Interest: 18.5 lacs
Amount: 28.5 lacs

So, if I simply divide this across 20 yrs and 12 months each ryr, then the EMI would be: 11875

Instead banks have charts which says that for every 1 lakh loan (interest being 9.25) the EMI would be 9200. This is less than my simple calculation.

I understand that as one pays out EMIs the principal reduces and banks take into consideration all such factors. But this process of arriving at a constant EMI (in this cae 9200) is never transparent to the customers.

Can anyone point out how all this calculation is done. Any site where I can learn this?

pank2012

There is small correction in the formula you are using.


This is the formula to calculate EMI:

E = P×r×(1 + r)^n/((1 + r)^ n) - 1)

E is EMI

where P is Principle Loan Amount

r is rate of interest calculated in monthly basis it should be = Rate of Annual interest/12/100

if its 9.25% annual, then r=9.25/12/100=0.007708

n is tenture in number of months n = 12*20 = 240

Eg: For 100000 at 9.25% annual interest for a period of 20 years

it comes to

EMI = {1000000 X 0.007708 X ((1 + 0.007708)^240)} / {((1 + 0.007708)^240) - 1}

=(1000000*0.007708*((1+ 0.007708)^240))/(((1+0.007708)^240)-1)

= 9158/- approximately 9200/-

gharondabhai

There are no fixed formula for loan EMI calculation. Bank employs their financial wiz kids to workout the best proposition for the ban. In general, there are daily reducing, monthly reducing and yearly reducing methods.
Daily reducing to different banks are different... technically, it should be the day your EMI is debited from your paying account but banks are greedy and some go to the extend of crediting the EMI account to your loan account only at the end of the month!!
Just do a simple survey, ask few banks to give you EMI for same loan amount and same interest rate ... interestingly, there will be a small difference.

My advice is, don't count the pennies ... there are many and many important factors for a home loan .. unfortunately most of the people are blindly carried away by interest rate only!!

deepOne

Could you pls. help important factor for home loan?
It would be helpful to everyone

manugnair

Hi All ,

The following are the most important factor on the home loans

a) The EMI is based on daily reducing balance method. This means if you had deposited money on 5th then the bank will charge on the balance from 6th onwards where as in the monthly reducing balance the impact of you paying the principal component is from the next month only

b) No prepayment of penalty... though RBI/NHB has given a circular on it ... there are companies who are still charging ... stating to customers that they are under discussion on it

c) Loan given on the basis of base rate ... RBI has prescribed the method of computation of base rate and all the banks have to publish the same.

d) Take loan from bank which reduces the rates when RBI reduces its repo rate

e) Ask for all documents before sanction of loan ... this ensures that you are buying a right property.

f) you can see your interest and payment statements online

g) feature to park and withdraw surplus funds and thereby pay less interest .... like max gain feature of SBI

My personal experience is that SBI has all the above feature .. though they take time on disbursement once done you are reassured for years.

vikasn

What about the period when full EMI starts. Axis bank starts full EMI at possession or 18 months, whichever is earlier. So it is 18 months mostly.

For HDFC full EMI starts only after possession.

nitinloomba

Can someone please tell me how the ratio of the Principal and interest calculated by banks in the EMI.

In the example shown below if 9200 is the EMI , what is the ratio of the Principle and Interest??

Is it constant for all banks ??

stinaikar

The ratio would keep changing from month to month. In the first month, the interest would be 7700 and the principal 1500. So the ratio would be 0.1948. In the second month, the interest would be 7697 and the principal, 1503, so the ratio would be 0.1952. The ratio would go on increasing as you would move towards the end of the loan tenure. Somewhere around the 12th year, the ratio would exceed 1.

nitinloomba

Ok , but how is the ratio determined .. does it vary from bank to bank???

fritolay_ps

pls refer attached xl based loan calculator...

Attached Files

Loan_Calculator.zip (27.0 KB, 34 views)