Are you aware that you can efficiently compute your Equated Monthly Installments (EMI) hassle-free from the convenience of your home, utilizing Microsoft Excel? Let's delve into how this can be achieved, making financial management more accessible and convenient for everyone.
What is EMI?
"EMI" stands for Equated Monthly Installment. It refers to a fixed amount of money that a borrower pays to a lender at a specified date each calendar month. EMIs are typically used to pay off both interest and principal every month so that over a specific number of years, the loan is fully paid off. This payment method is commonly associated with loans such as home loans, car loans, personal loans, etc.
What are the elements needed to determine the EMI?
For calculating EMI let us take an example of the items that are prerequisites:
Loan Amount: It is the principal or original loan amount represented in Excel via PV or Present Value. Suppose in our example Mr. Yash requires a home loan of Rs. 55,00,000 and wants to determine its EMI estimates to plan his financial journey.
Interest Rate: It is the annualized amount of interest charged on the principal amount. As the monthly installments are paid which are inclusive of both Principal and interest, in earlier years the amount of interest charged is higher due to the higher amount of Principal outstanding. In Excel, it is represented by rate and suppose Mr. Yash can obtain a loan at an annual interest rate of @12% from Dena Bank. For the monthly interest rate, the annualized rate is divided by 12, in Mr. Yash's case, the monthly interest rate is 1% (12%/12).
Period: It is the total period of the loan tenure for which the EMI is paid and at its end the principal amount is fully paid off. It is represented by the term “nper” in Excel and suppose Mr. Yash wants the loan for 10 years or it can be presented as 120 months (10*12).
Future Value: It is the remaining value of the principal at the end of the loan period and generally this amount would be 0.
Type: It can be either “1” or “0”. Suppose Mr. Yash took a loan on 1st April 2024 and pays his first EMI on 30th April 2024, in such case his EMIs begin from the end of the period and the figure inserted here would be “1”. If the first installment coincides with the date of disbursement, then “0” would be used in this parameter.
What is the formula for EMI in Excel?
Using the above parameters, EMI is calculated in a single formula called “=PMT” as shown in Illustration 1 just by putting values in respective fields, it has to be noted that the period should be in terms of the number of months and the interest rate should be for a month and not annualized.
How to put parameters in Excel?
Continuing our above example, we can estimate the EMI from Illustration 2 which Mr. Yash has to pay each month to complete his loan within the prescribed period. By calculating so Mr. Yash can determine his risk appetite, prepare better financial planning, and reduce the default risk. It allows him to choose the loan amount and tenure according to his needs and repayment capability.
One could question the presence of a negative sign in the EMI amount. The explanation is straightforward: while the loan amount signifies an inflow of cash, the EMI represents an outflow of cash for Mr. Yash. Hence, it is depicted with a negative sign to denote the opposite direction of cash flow.
What if the EMI amount is given?
Suppose Mr. Yash knows he can pay Rs. 78,127.74 as his monthly EMI and wants to determine the period under which he can repay the loan, being other factors the same as the above example. In that case, excel provides another formula called “=nper”, just like the EMI formula the parameters are to be inserted in the field shown in Illustration 3 and Illustration 4. The resulting answer would be the number of months required to pay back the loan which in the case of Mr. Yash turns out to be 120 months, meaning 10 years (120/12).
Similarly Present value i.e., the original amount of the loan can be calculated using the PV Function and the interest rate can be calculated using the rate function. All of these can be summarized in the following table:
What to Find? | Function in Excel |
|---|---|
EMI (Payments) | Pmt |
Period (Tenure) | Nper |
Future Value | Fv |
Present Value | Pv |
Rate of Interest | Rate |
Conclusion
In conclusion, understanding and effectively managing Equated Monthly Installments (EMIs) are crucial aspects of financial planning, especially when dealing with loans such as home loans, car loans, or personal loans. With the accessibility of tools like Microsoft Excel, individuals can effortlessly calculate their EMIs based on parameters like loan amount, interest rate, and loan tenure. Through such empowered financial management, individuals can navigate loan repayment with confidence and ensure a more secure financial future.
You can download the EMI Calculator by clicking this link below: