How EMIs Principle and Interest breakup is done

Do you know who to calculate principle and interest part in your home loans EMI break up? Do you know how each EMI is distributed to principal and interest repayments? It is extremely important to have this knowledge because a lot of real life decisions like prepaying the loan, opting for the loan tenure and many more such aspects depend on how your EMI is structured. Basics of Home Loan EMIs

What happens in a general scenario? Loan is opted for from a Bank and you start paying your EMIs each month as contracted (see this excellent article on how EMI formula is derived). When you pay your EMIs, some part of it goes towards interest and remaining towards principal repayment. So each month you are reducing your loan by some extent and now as your loan have reduced, you will be paying less interest on your next instalment. In the same way, with each passing month, your loan gets paid by some amount and balancing amount keeps on reducing resulting in paying lesser interest month on month and year on year and the day comes when you fully close your loan. Note that your EMI is generally fixed and internally its worked out into interest and principal repayments. However, even today, a lot of people have no understanding of the idea that in the early years of repaying the loan, interest component is very high as compared to principal repayment. The longer the tenure of the loan, the interest component will be higher than principal payments and also the rate at which the interest part will come down will also be lower, making sure that in the initial years most of the EMIs goes towards Interest and not principal.
Example of EMI payment

Lets say you take a HDC Home Loan of Rs 30 lacs for 20 yrs tenure, your EMI would be Rs 28,950/month. In the first EMI, the interest part would be Rs 25,000 and only Rs 3,950 will be the principal payment, which means out of total hdfc home loan of 30 lacs, only Rs 3,950 will be reduced in the first month and rest Rs 25,000 will go away in interest. Sounds disappointing? What is EMI disease ? In the same way After 100 payments (8 yrs and 4 months), when you would be paying your 101st EMI of Rs 28,950, the interest part would still be as high as Rs 19,891 and the principal part would be Rs 9,060. Still disappointed? Now lets fast forward towards the end, lets take 200th payment. When you make your 200th EMI payment of Rs 28,950; this time your interest part would be very less at Rs 8,349 and principal would be Rs 20,601. So now, with all these examples I gave, you can see how interest part is very high in initial years. Lets look at it from a different point now! Just consider this- For the scenario above; If you keep paying your EMIs for 2 yrs (24 payments), you will pay total of 6.94 lacs (24 x EMI) from your pocket, but your loan would just go down by 1.05 lacs! And your outstanding loan would be still 28.95 lacs. In the same way in 5

yrs even though you pay around 17.37 lacs (60 x EMI), your loan outstanding would be down by just 3.06 lacs and loan outstanding would be just Rs 26.94 lacs. The chart below shows the breakup of interest and principal payment for each year for a 30 lacs loan for 20 yrs tenure assuming interest @10%. So each bar is broken into two parts, where green bar represents Interest part and orange bar represents principal part. It is clearly visible that how interest forms a major part of overall EMI in initial years and only in the later years principal part becomes high.

Here is the actual breakup of the EMI in numbers

Pre-payment of long tenure loan

A lot of investors opt for 15-20 yrs loan thinking that they will pre-pay the loan in next 4-6 yrs itself because of their salaries will rise or for some other reasons. In these cases, for the initial years they keep paying loan interest only and not a lot towards principal. When they prepay the loan, they end up paying a little lesser amount then original loan amount. Example, if you take a loan of 30 lacs for 20 yrs tenure at 10% p.a. and prepay the loan in 5 yrs itself, you will still end up paying 27 lacs as loan outstanding, even though you have already paid 17 lacs in EMI in last 5 yrs, Pre-payment penalty would be extra! But the positive side is that there might be a good appreciation in the house value itself. So if you are taking loan for longer duration thinking that you would pre-pay the loan very soon, you need to rethink! This makes sense, once the worth of your house has gone up and there is a decent profit. A better option which I can think of is to pre-pay in small chunks each year along with your EMIs from the start of the loan payment. It would make sure that you principal goes down in big chunks each month. If you take short term loans, because of the shorter duration, the bigger chunk of the EMI is actually principal part, hence you can look forward to pre-pay the loan incase you wish to.
Free Calculators for Loan Amortization

I have created and found out some loan amortization calculators which you can use for calculating your EMIs and its breakup into principal and interest for each month.

Download Excel version of Loan amortization calculator (created by me) Use this Advanced EMI calculator (copyright Manu NIIT) Download this multi variable EMI calculator (Source : Joe Verghese) Use the below embeded Loan EMI breakup calculator (direct link)

The EMI Disease

by Manish Chauhan 112 comments A dog held a juicy bone in his jaws, as he crossed a bridge over a brook. When he looked down into the water he saw a another dog below with what appeared to be a bigger juicier bone. He jumped into the brook to snatch the bigger bone, letting go, of his own bone. He quickly learned, of course, that the bigger bone was just a reflection, and so he ended up with nothing! What do we learn from this short story? Some thing, really similar to this story is happening in our lives where the bridge which we are cross is our lives, the bone is our home,(or car or any thing we own) and the other dog is none other, than the people around us, our friends at work, neighbours, relatives etc., who might have a bigger home than us, a better car or a more expensive LCD.

Does that mean that we also need to run towards that bigger bone? Yes? No? There is no harm in fulfilling our needs. As our families grow, and our need for comfort increases, we are bound to buy bigger homes, better cars (read more expensive) et al And while we are at it, why not buy that much bigger LCD or enjoy that international holiday with the family? The EMI system changes our wants into needs .
Is Installment system of payment bad ?

Definitely NOT! Its a very convenient way of buying things, but the problem, is that the EMI way of buying, gives a lot of people the feeling that they can afford anything which comes their way. And there lies the problem! A sizable chunk of people believe, that they need a bigger bone (when they actually dont) and the easy availability of everything, in EMIs plays a large role in said belief. The EMI is such a beautiful concept, that even a person with salary of 30k can buy a helicopter! Why not? Just 9999 per month, for next 200 years! Does he need it? Who cares? He can afford it! The problem is not the EMI concept in itself. The problem is us losing our control on our spending and extending our affordability horizon to such great lengths, that we have everything in our life; but most of it is under debt. Our home and our car are the two classic examples of this. Lets talk about the home. I dont have much data, but my instinct says that most of the people who have taken a home loan, are living in a much bigger home than they need. As per an in-house study, (through a poll,) I found out that as much as 67% of the readers on this blog or urban net savvy people are paying at least 1 EMI, which would mostly be a house or car loan EMI. It was astonishing to see that 11% of readers here pay more than 3 EMIs! Thats too much!. Make sure that your EMIs are not more than 50% of your total, in hand (net), salary.

Affordability of EMI vs affordability of Loan

If you tell a person, the EMI of a product, chances are that they will believe that he/she can afford it, as compared to when you tell them the actual price of the product. The problem lies in the numbers. The lower the number, the more affordable it becomes! However this is not true! Actually, the more you reduce the EMI figure, the longer the tenure, and hence the total cost for you over a long period of time increases drastically! Lets take some products . Home Loan A classic example is the Home Loan. When a person plans for a loan, he makes sure that the EMI figure is affordable to him and does not concentrate much on the final value. For example, consider a person earning 50k per month. The EMI for a home worth 30 lacs @10% will be Rs 39,645. This may look unaffordable to him, so he increases the tenure to 20 yrs instead of 10, and brings down the EMI to 28,951/- Magically, this same home starts looking affordable to him! What they concentrate upon, is the initial years, and not the big picture. They might not be considering some important points like what if interest rates increase to 14%? In which case, the EMI will go up to 37000/- ! These are young, recently married individuals, who have no idea of where they will be working in next 5 yrs. Will they be in same job or same Industry? What will be their liabilities then? A close look at Real Estate Returns in India I am not sure, if a 3 BHK is the right choice for a recently married couple who has no one else with them, to live with. The justification can be that in future they may require it, however if thats going to happen in next 15-20 years, a 1 BHK or 2 BHK is a better choice. Its better to live in a 1 BHK and breathe easy, rather than a 3 BHK and suffocate every day from the burden of the heavy EMI. Heres a good article on Home Loan EMI calculation . Calculate your EMI Car Loan A lot of people buy a car before a home, as the EMI is affordable and the car adds to their comfort. I know a lot of people who can easily manage their life with a bike or without a vehicle, but have bought a car for reasons only known to them. There are just 2 people in the family, both have company transport, arent really outgoing, but they have a car. Not sure why! A car is a depreciating asset. This means, that when you buy a car on loan, you are paying more money for something, whose value is coming down day by day, unlike your home. So buy a car, only when its really important or your comfort gets more bigger than your simplicity, when commuting is a problem. The main problem again, is people buy cars that are much bigger and costlier than what they can afford and need. If you are in the starting phase of your career and have no more than 4 people in the family, why take anything beyond a Santro or Zen? You can always buy that dream car when you are more stable in your career and the other important things in life are taken care of. My

views may be biased because I am not a car or vehicle lover, so all car experts might disagree with me here Holiday/LCD/Camera/Air Tickets IRCTC has started giving air tickets on 6 equal EMIs! There is no catch! You can buy a ticket worth 3k today and pay 500 a month over 6 months. The only catch, is that this makes many people feel that they can afford it now. A student who was earlier travelling second class in train or at most, 3rd AC will not just be tempted, but will believe that he can afford air travel now, which he couldnt, if he had to shell out 3k in one go. Just because its a smaller chunk, we tend to buy things which we dont need and cant afford. Holidays are a perfect example! We Indians, are earning very well in this new decade, thanks to the opening up of our economy and IT sector especially. Our future earnings are more predictable now, compared to the past and this is the reason why most of the products are available on EMI; which makes us buy today and then pay for it for next couple of years.
Conclusion

There is nothing wrong in buying things on EMI, as long as you know what you are doing, and then only if you really need it. Dont run after everything you can get on EMI, and dont drown yourself in so much debt, that it gets tough to come out. Save a good amount for down payment and take debt only when buying something becomes inevitable. An early Start in Saving today will make you wealth overtime .
Calculating EMIs Most of the software engineers I know here in Bangalore have either already bought a house or are planning to buy one. The biggest incentives are perhaps the easy availability of home loans at interest rates far lower than that available to the previous generation and the tax-breaks one gets here in India on the principal and the interest paid on home loans. Our generation is also not averse to taking on a debt unlike the previous generation. In addition, many of us feel that it is better to take the plunge now and enjoy the comforts of your own house than to diligently save all the required money for years and then buy a house, only to find out that the dream was realised a bit too late in your life. When one takes a loan, a natural question that comes to mind is how much would the EMI (Equated Monthly Installment) be that one has to pay back to the bank every month. Finding out the EMI for different tenures of the home loan allows one to select the best tenure based on one's current and projected income and expenses and possibly other factors. What I find is that most software engineers would rather construct or borrow elaborate spreadsheets for this purpose or use a web-based EMI calculator rather than calculating it themselves. Some brave souls ask around for the formula to calculate EMIs and then try to write a programme that calculates the EMIs for them. I find it particularly appalling that very few bother to figure it out for themselves, especially since it involves elementary algebra that most of us have surely learnt in high school. It either reflects the creeping sloth and sloppiness in our generation or the rote learning and regurgitating of

formulae that our system of education seems to encourage. In any case, I attempt to show in this post how simple it really is to figure out how to calculate EMIs on your own and to hopefully encourage my fellow engineers into applying the basic mathematics they learn in school to real-life problems themselves instead of looking around to see if someone else has solved it for them. For the sake of simplicity, assume that the loan is offered on a "monthly rest" basis. That is, the bank calculates the interest at the end of every month on the amount you still owe to the bank at the beginning of the month, adds it to the amount you already owe and then deducts your EMI from this to calculate the total amount you still owe to the bank at the beginning of the next month. Some banks offer loans on a "daily rest" basis, where the outstanding amount and the interest is recalculated every day, but you still pay back on a monthly basis. The older "annual rest" basis is no longer in use as far as I can tell. Note that it is easy to adapt the formula given here to the "daily rest" basis and that is, of course, left as an exercise for the reader. Suppose you take on a loan for P Rupees, the tenure of the loan is n months (for example, n=240 for a 20-year loan), the monthly rate of interest is r (usually calculated by dividing the annual rate of interest quoted by the bank by 12, the number of months in a year, and dividing that by 100 as the rate is usually quoted as a percentage) and E Rupees is the EMI you have to pay every month. Let us use Pi to denote the amount you still owe to the bank at the end of the i-th month. At the very beginning of the tenure, i=0 and P0=P, the principal amount you took on as a loan. At the end of the first month, you owe the bank the original amount P, the interest accrued at the end of the month rP and you pay back E. In other words: P1 = P + rP - E or to rewrite it slightly differently: P1 = P(1 + r) - E Similarly, at the end of the second month the amount you still owe to the bank is: P2 = P1(1 + r) - E or substituting the value of P1 we calculated earlier: P2 = (P(1 + r) - E)(1 + r) - E and once again expanding it and rewriting it slightly differently: P2 = P(1 + r)2 - E((1 + r) + 1) where "xy" denotes "x raised to the power y" or "x multiplied by itself y times". To make this look slightly simpler, we substitute "(1 + r)" by "t" and now it looks like this:

P2 = Pt2 - E(1 + t) Continuing in this fashion and calculating P3, P4, etc. we quickly see that Pi is given by: Pi = Pti - E(1 + t + t2 + ... + ti-1) At the end of n months (that is, at the end of the tenure of the loan), the total amount you owe to the bank should have become zero. In other words, Pn=0. This implies that: Pn = Ptn - E(1 + t + t2 + ... + tn-1) = 0 which means that: Ptn = E(1 + t + t2 + ... + tn-1) We can simplify this further by noticing that we have a geometric series of n terms here with a common ratio of t and a scale factor of 1. The sum of such a series is given by "(tn - 1)/(t - 1)", which we substitute in the above equation to yield: Ptn = E(tn - 1)/(t - 1) which can be rewritten as: E = Ptn(t - 1)/(tn - 1) which can again be rewritten by substituting the value of t back as "(1 + r)" as: E = Pr(1 + r)n/((1 + r)n - 1) and this is the formula for calculating your EMI. This formula can also be rendered more clearly as:

Suppose you take a loan from a bank of 10,00,000 Rupees for 15 years at 8.5% annual rate of interest calculated on a monthly rest basis. In that case, P = 10,00,000, n = 1512 = 180 and r = (8.5/12)/100 = 0.0070833333. Putting these values into the formula given above gives us E = 9847.40 (approximately). When you write a programme to calculate your EMI using the formula given above, be careful to structure your computations to accommodate loss of precision and rounding errors. For more information, read "What Every Computer Scientist Should Know About Floating-Point Arithmetic" (PDF) by David Goldberg or section 4.2, "Floating Point Arithmetic", in "The Art of Computer Programming,

Volume 2: Seminumerical Algorithms" (3rd Edition) by Donald Knuth. Update (2006-12-19): Clarified how "r" is calculated from the quoted interest rate and added an example to illustrate the application of the formula. Added references to Goldberg's article and Knuth's book for the caveats to bear in mind while using floating-point arithmetic. Update (2007-02-01): The only intent of this post was to show how basic mathematics can be used to calculate EMIs. I am just an ordinary computer programmer and not a financial consultant. Please stop asking me for advice on your loan plans!