In our daily life we face enormous application of mathematics. Calculation of equated monthly installments (EMI) for car or home loan is one such common application of mathematics.
EMI or equated monthly installments is the most popular form of loan payment. It is a fixed amount of repayment made every month towards the loan, which includes payment towards both principal and interest. Most of us always believe the bank executives blindly on the figure which they quote as EMI.
This post is to explain the mathematics behind EMI and how to calculate it in excel using inbuilt excel function. If you wish to learn shortcut to find the time required to double a sum of money invested at certain rate of interest, you can apply Rule of 72.
EMI Calculation Formula
EMI= P x r x (1 + r)^n / ((1+r)^n -1)
Here p = principal amount (loan taken)
r = interest rate per month (ex: if interest rate per annum is 10% then 10/(12*100))
n= tenure in months
EMI = 100000*0.01*(1+0.01)^24 /((1+0.01)^24 -1) = 4707
p = loan taken = 1,00,000
r = interest rate per month = 1% = 0.01
n= tenure in months = 2 Years = 24 months
This formula assumes, EMI payment is made at the end of each period (month). This is also called EMI in arrears. If EMI is paid at the beginning of each period it is called EMI in advance.
Further additions will be done on EMI for any other processing fee or possible charges which may be applicable as per the rules of financing institutions (bank).
Calculation of EMI in excel
In excel it is very simple to calculate EMI. There is an inbuilt formula for EMI calculation called PMT
Rate – Interest rate for the loan.
nper – Total number of payments for the loan.
PV – Present value/principal or loan taken.
FV – Future value (you can omit it)
Type – we have to put the value either 0 or 1. If payments are made at the beginning (EMI in advance) of each period, 1 is used. If EMI payments are made at the end of the period (EMI in arrears) put 0. If omitted 0 is taken a default value. Just open a new excel file and try it yourself.
Lot more can be discussed about EMI. Please share your knowledge, doubts or experiences with EMI calculations by posting comments below.