What is Equated Monthly Instalment (EMI) in a loan?
An Equated Monthly Instalment or EMI is a set amount of money a borrower pays to the lender on a specific monthly date. This payment includes both the interest and the principal amount of the loan.
The borrower eventually repays the full loan amount by making these regular payments over a certain number of years. This repayment structure is commonly used in loans to buy a house, a car, or fund education.
The advantage of EMIs for borrowers is that they clearly understand how much they need to repay their monthly loan. This can facilitate personal budgeting. For lenders or investors who purchase the loan, the benefit lies in having a consistent and predictable income stream from the interest on the loan.
How do I calculate a loan’s Equated Monthly Instalment (EMI)?
When calculating your personal loan EMIs, you can use two different methods: the flat-rate method and the reducing-balance method.
- Flat-rate method
The formula for calculating your EMI using the flat-rate method is as follows:
EMI = (P + (P x T x I)) / (T x 12)
In this formula, ‘P’ represents the principal amount of the loan, ‘T’ is the loan tenure, and ‘I’ is the flat interest rate.
For instance, suppose you borrow S$15,000 at an 8% (or 0.08) interest rate for ten years (or 120 months) with monthly instalments. Here’s how you can calculate your EMI:
EMI = (15000 + (15000 x 10 x 0.08)) / (10 x 12)
Your EMI would amount to S$225 per month.
- Reducing-balance method
The formula for calculating your EMI with the reducing-balance method is as follows:
EMI = (P x I) x ((1 + r)^n) / (t x ((1 + r)^n) – 1)
In this formula, ‘P’ represents the principal amount borrowed with ‘I’ as the annual interest rate, ‘r’ as the periodic monthly interest rate, and ‘n’ as the number of months in a year.
By plugging in the values of these variables, you can calculate the EMI using the reducing-balance method.
What influences the Equated Monthly Instalment (EMI) in a loan?
These three elements impact your EMI:
- Credit score
Your credit score plays a significant role in determining your EMI. It reflects your creditworthiness and affects the interest rate you may be offered.
- Interest rate
The interest rate applied to your loan directly affects the EMI. Higher interest rates result in larger EMIs, while lower interest rates lead to smaller EMIs.
- Loan tenure
The duration or tenure of your loan is another crucial factor. Longer loan tenures result in smaller EMIs, while shorter tenures lead to larger EMIs.
Additionally, certain eligibility criteria indirectly influence the EMI calculation. While these criteria may vary among lenders, some common requirements include the following:
- Singapore citizenship or Permanent Resident (PR) status.
- Foreigners may apply but must have an existing cash line or credit card account.
- Age between 21 and 75 years.
- Minimum annual income of S$20,000.
