When you apply for a credit card or loan, lenders will take a look at a variety of personal and financial details, such as your credit score. Your credit score is an important factor that determines whether you will be eligible to get you credit card or loan request approved, and also the amount that you can receive. In this article, we’ll discuss the importance of having a good credit score, and what you can do to maintain it.
How Credit Score is calculated
In India, credit scores are generally measured by CIBIL. On a scale of 0-900, a score of 750 and above is considered excellent, while scores between 600 and 750 are fair. Anything less than 600 is considered to be bad.
CIBIL scores are calculated based on a variety of factors, some of them including the credit card and loan applications made by a borrower, the amount they borrow or spend on their card, as well as their repayment habits. Let’s suppose you take a loan of Rs. 20,000 from a lender, and keep making late payments or are unable to repay it at all. This negatively impacts your CIBIL score. However, if you consistently make timely repayments on your loan, it will increase your credit score.
Since credit or CIBIL scores are indicative to a lender about an individual’s financial habits and creditworthiness, therefore, your access to formal credit (especially when it comes to home loans and vehicle loans) is highly dependent on your CIBIL score. A higher credit score makes you eligible for larger loan amounts, as well as attractive interest rates and repayment tenures.
One of the reasons why some people end up with low CIBIL scores is because they struggle to repay the loan due to poor financial management. Some individuals who earn a high salary, in spite of borrowing an affordable loan amount may not pay their EMIs on time because they have too many outstanding debts, overspend, etc. Other individuals who struggle to repay the loan usually do so because their EMIs end up becoming too heavy a burden on their monthly budget.
If you have an unexpected financial emergency and require urgent funds, it’s still fine to consider getting a loan to take care of the issue. However, the main consideration to keep in mind is your monthly EMI amount and whether you can comfortably afford to repay it.
How to Calculate Monthly Loan EMI
An EMI is an equated monthly instalment, or the fixed amount the borrower must repay each month over the duration of their loan tenure. A personal loan EMI is calculated based on several factors, which include the principal amount, interest rate, and repayment tenure.
As mentioned above, your monthly EMI amount should be your primary consideration when applying for a loan and selecting a lender. Most borrowers make the mistake of simply going for the lender that provides the lowest interest rate, in an effort to save money. However, these same borrowers are likely to struggle repaying their EMIs. Therefore, knowing your EMI will help you to know whether you can accommodate it in your budget, as well as help you prepare your finances accordingly.
For example, a loan of Rs. 1 lakh having an 18% annual interest rate and a repayment tenure of 24 months will have a monthly EMI of Rs 4,992. However, with the same principal amount and interest rate will give you an EMI of Rs. 9,168 when spread across a repayment tenure of 12 months. That’s a whopping 83% increase in the EMI as compared to the loan with the 24 months repayment tenure! This is why knowing your EMI beforehand is so crucial.
There are two ways you can calculate your loan EMI. The first involves a manual calculation, and the second way is to use a personal loan EMI calculator. To calculate your EMI, you will need the following details:
- Principal loan amount (how much money you want to borrow)
- Interest rate
- Loan tenure (the duration for which the loan is sanctioned)
Here is the formula to manually calculate your EMI:
Personal Loan EMI= [P X R X (1+ R) ^N]/ [(1+R)^N-1]
P is the principal or loan amount that is borrowed
R is the rate of interest charged on the principal (monthly rate)
N is the loan repayment tenure or the number of monthly instalments that you have to pay every month
We’ll take an example to explain how the above formula is used to calculate your EMI. Let’s suppose you’re taking a loan of Rs. 1 lakh for 1 year duration, with a 20% interest rate per annum.
First and foremost, the annual interest rate must be converted into months. The loan tenure must also be converted into months. In order to convert the interest rate into months, simply divide the annual interest rate by 12 months. Therefore, 20/12 = 1.66%. This is the monthly interest rate. The one-year loan tenure also needs to be converted into months before we can use it in the formula; in this example, the tenure is 12 months.
Using these three variables, we must incorporate them into the formula, as follows:
EMI= [P x R x (1+R)^N]/[(1+R)^N-1]
EMI= [1,00,000 x 1.66/100 x (1+ 1.66/100)^12/ [(1+1.66/100)^ 12-1)
EMI= Rs. 5,089.5
This calculation is not only tedious, but lengthy! Additionally, one can be prone to making errors while manually calculating the EMI, which can gravely impact your finances. That is why it is advisable to use the personal loan EMI calculator.
How to Use a Personal Loan EMI Calculator
All one needs to do is enter the three variables of their loan (principal, monthly interest rate, and tenure in months). After entering these values in the EMI calculator, it will instantly display the monthly EMI you will need to pay. Do remember to convert the loan tenure and interest rates into months before entering them in the calculator, so as to get the correct EMI amount.
One must remember that EMI is inversely proportional to the loan tenure. This means that while the amount of interest to repay will increase if the loan is availed for a longer tenure, your monthly EMI amount will actually lower when the loan is repaid over longer tenure.
The EMI amount can be adjusted easily, simply by increasing or decreasing the parameters of your loan amount and tenure. If you decide you want to pay a higher EMI than the amount you get in your initial result, you can either increase your loan amount (if you are eligible for a higher amount). If you feel the EMI is higher than what you can repay every month, you can simply lower the principal amount, or increase the repayment tenure.
Benefits of using Personal Loan EMI Calculator
- Saves time: The personal loan EMI calculator saves time, because it’s simple and quick. One can even make numerous calculations in just a few minutes, by entering the loan details and letting the EMI calculator do all the hard work!
- Accuracy: If you manually calculate your EMI, you have higher chances of making mistakes in the calculation which will result in inaccurate information. This can also negatively impact your personal loan! The formulas in the personal loan EMI calculator will accurately determine your EMI amount, in just a few seconds!
- Planning Your Budget: When planning to take out a personal loan, one needs to ensure they can accommodate the same in their budget. With the Upwards EMI calculator, you can easily plan your budget while making the required adjustments to determine your EMI amount.
Having a high credit score is indicative of your creditworthiness and financial stability. This will determine your eligibility for loans, as well as the amount you can borrow and the repayment terms.
Since repayment history is one of the main ways that your credit or CIBIL score is impacted, it’s a good idea to know your monthly EMI amount in order to determine whether you can repay the EMI with ease. Manually calculating the EMI amount is a complex process; not only is it time-consuming, but you are more prone to making errors and getting inaccurate results.
Therefore, simply use a personal loan EMI calculator, which is a quick and easy-to-use tool which will provide accurate results instantly. You can even use it as many times as you need in order to calculate multiple EMI amounts. As soon as you get the EMI amount, just click on ‘Apply Now’ and get started on your loan application!