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The Ultimate Formula to Calculate the EMI You Can Afford

Is 40% of salary enough for paying your EMI?

Equated Monthly Installments, or EMIs, are a payment method many financial institutions advocate for, helping you finance anything from a smartphone to your dream house! Although EMIs have been around for a long time, most people are still in the dark regarding how they can be availed. Read this blog further to understand all things EMI!

How do EMIs work?

Mutually beneficial for borrowers and lenders, EMI programs are usually set for one payment per month. This helps the borrower determine how much money to keep for monthly loan repayment and plan ahead. In addition, lenders profit from the steady income they will receive monthly from the borrower.

Key Factors Impacting Your Loan Interest Rates and EMI

  1. Type of Interest: You can choose between fixed, floating and mixed interest rates for your loan. While floating fluctuates with RBI norms, fixed rates remain the same throughout the loan tenure. Mixed interest rates start as fixed rates for a particular period and follow floating rates for the remainder of the loan tenure.
  2. Credit Score: Your credit score is proof of loan repayment and financial discipline. A higher credit score indicates lower credit risk, meaning lenders will be willing to offer lower interest rates on loans and vice versa.
  3. Job Profile: A steady income ensures a lower credit risk situation; hence lenders will be more inclined to offer lower interest rates for these people than self-employed individuals with an unstable income.
  4. Loan Tenure: Most short-term loans attract lower interest rates but will have higher EMIs. Long-duration loans will have lower EMIs but have higher interest rates.

How To Calculate Your Potential EMI?

Below is the EMI calculation formula, and it can be used to calculate all loans, including home loans, car loans, personal loans and loans for education:

EMI = P × r × (1 + r)n/((1 + r)n – 1)

where; P= loan amount, r= interest rate & n= tenure in number of months 

The ideal EMI cost for an individual’s well-balanced financial diet is about 30% of your income. But, in any case, make sure it doesn’t exceed 40%.

How to accurately calculate the EMI you can afford?

3 Important Factors to Consider When You Take an EMI for your income

  1. Make a note of your present and future liabilities: Sign up for an EMI that allows you to save 15-20% of your income for emergencies. Keep in mind inflation, salary hikes and expenditure while fixing the ideal EMI for you.
  2. Be prepared for interest hikes: This is possible in cases of mixed or floating interest rates. Be prepared to pay a higher EMI just in case.
  3. Follow the 40% rule: Understanding the percentage of your income that can be converted to an EMI is essential for financial planning. Therefore, be mindful that your EMIs do not exceed 40% of your total income. This is because:
  • Nearly 30% of your salary will be spent on food, bills and other essentials.
  • 20-25% of the income should be invested.
  • 15% to be kept aside for emergencies

Ensure that your EMI is tailored to suit your income. For example, if an individual’s monthly income is ₹20,000, taking away 40% would mean that they would be left with just ₹12,000 to fulfil all other monetary needs. In this case, considering a lower EMI is better.


Frequently Asked Questions

Q1) How much EMI can I afford?
Ans) An EMI is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. The best EMI for you can be calculated by:

EMI = P × r × (1 + r)n/((1 + r)n – 1)

where; P= loan amount, r= interest rate & n= tenure in number of months

Q2) Which are the best online home loan EMI calculators?
Ans) Some of the commonly used home loans EMI calculators are:

  • Bank Bazaar
  • HDFC Bank
  • Axis Bank
  • Paisa Bazaar
  • Bajaj Finserv
  • Clear Tax
  • My Loan Care

Q3) How is EMI deducted on a credit card?
Ans) EMIs on credit cards use a reducing balance approach to deduct EMIs. Similarly, for a home loan or a personal loan, the principal loan and interest amount have to be paid every month, progressively reducing your debt until complete payment is recovered.

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