Financial planning becomes essential for students who want to pursue higher education by applying for an education loan. One of the important components of financial planning is understanding how to calculate your Equated Monthly Instalments (EMIs). EMI calculation allows you to adjust your budget according to your monthly payments. This article explains what an EMI calculator is, its importance, how to use it, and key factors that affect your EMI.
What is an Education Loan EMI?
Education loan EMI is a fixed amount that you pay every month to the lender to repay the loan you borrowed for education purposes. This amount is calculated using three elements:
- Principal Amount (the loan amount you borrowed)
- Rate of Interest
- Tenure of the loan
These values are entered into the formula to calculate your monthly EMI:
EMI = [P × R × (1+R)^N] / [(1+R)^N – 1]
Where:
P = Principal loan amount
R = Monthly interest rate (annual interest rate divided by 12)
N = Loan tenure in months
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You can input varying terms of ed loans into this formula to calculate your EMI. However, to avoid errors in manual calculation, you can use an online EMI calculator. This tool becomes essential, especially when you are managing both tuition and living expenses.
Understanding How to Use an Online EMI Calculator
Using an online EMI calculator is simple since it only requires three inputs: loan principal, interest rate and tenure. Once you enter these values, the calculator displays:
- The total interest that you need to pay.
- The total loan amount that includes interest and principal
Let us understand EMI calculation with an example. Let us assume your loan amount is Rs. 10,00,000 at an interest rate of 10% for 10 years. When you input these values into an EMI calculator, you will get:
- Total interest to be repaid: Rs. 5,85,809 (approx.)
- Monthly EMI: Rs. 13,215 (approx.)
- Total Cost of Loan: Rs. 15,85,809 (approx.)
Some calculators may also provide an amortisation schedule that shows how each monthly payment is divided into interest and principal payments over the tenure of your loan.
Factors That Affect the Cost of an Education Loan
Now that we know how to use an EMI calculator, let us understand the factors that affect the cost of an education loan.
- Loan Amount: Your monthly EMI increases if your loan amount is high.
- Interest Rate: Education loan rates vary among lenders. A slight change in the interest rate has a major impact on the total loan cost.
- Tenure: If the loan tenure is long, you may have affordable EMIs. However, the total cost of the loan can significantly increase. On the other hand, short tenures result in reduced interest but may have higher monthly EMIs.
- Moratorium Period: It is the grace period offered by lenders during which you are not required to make EMI payments. However, interest is applied to the loan amount.
You can change the loan amount, tenure and interest rate to understand how they impact the payable interest and the total loan amount. This allows you to choose figures that align with your repayment ability.
Why are EMI Calculations Necessary?
Apart from giving you repayment clarity in advance, calculating your EMI allows you to:
- Understand how to align your finances with the repayment schedule.
- Structure your income post-education
- Avoid borrowing an amount that is beyond your repayment capability
- Compare loan terms provided by various lenders and choose terms that align with your budget.
How to Efficiently Manage Your Education Loan EMI?
Missing an EMI can lead to penalty charges. It can negatively affect your credit score, making it difficult to access loans in the future. Therefore, effective management of education loan repayment is necessary. Borrowers can manage or reduce their monthly repayments in the following ways:
- Making part-payments whenever possible can help you reduce the principal amount, and therefore the interest applicable.
- Choose a loan with lower interest rates.
- Tracking interest accumulation during the moratorium period can also be helpful.
During your higher education, you can also use an instant personal loan app to meet any urgent education-related expenses. These apps often help simplify tracking your repayments as well.
Conclusion
Calculating your education loan EMI amount is an essential part of financial planning. It enables you to structure your post-education finances, a phase when you start earning and managing your finances. You can use the EMI calculator to understand how changing each aspect of the loan affects the total loan amount. These calculations are necessary to ensure that your education remains financially sustainable. An EMI calculator also ensures that you make informed financial decisions after you complete your education.