What is a Business Loan EMI?
EMI or Equated Monthly Installment is an amount borrowers pay the lender monthly against their loan repayment. The amount comprises the principal loan amount and the interest component. The EMI depends on the interest rate applied to your business, which is a flat rate or reducing rate of interest.
In a reducing or diminishing interest rate, interest is levied monthly on the outstanding loan amount balance. Therefore, the amount on which interest is calculated decreases every month. The formula to calculate the interest is interest payable per EMI = Interest rate per EMI X Remaining loan amount. Therefore, the burden on the borrower is reduced, allowing for faster loan repayment.
On the other hand, the flat rate interest method keeps the interest component constant until the end of the loan repayment tenure. Then, the interest is calculated on the total business loan amount and the total repayment tenure. In this case, the EMI does not reduce, and the borrower must repay until the tenure ends. The formula for this method is interest payable per EMI = (Original loan amount Number of Years Interest Rate per annum)/Number of payments. So, the monthly EMI is calculated on the actual interest rate on loan, the type of interest rate applied, the total loan amount, and the repayment tenure.
Thanks to EMIs, loan repayment is easy and prevents borrowers from overstretching their finances to repay the loan. The instalments are spread over a period, and each payment has a fixed date. It allows borrowers to stay prepared with the amount so they never miss a payment.
How does Business Loan EMI Calculator Work?
The business loan EMI calculator allows borrowers to calculate the approximate monthly instalment they must pay on their business loan. You will find this calculator on the app or official website of most NBFCs and banks. When you see the calculator, you must enter the loan amount, tentative interest rate, and repayment tenure to know the monthly EMI you must pay. You must note that this amount will not include any taxes or charges that might be levied on your monthly instalments.
Reasons to Calculate EMI Before Taking a Business Loan
The practical reasons to calculate EMI before taking a business loan are explained below.
- Assists in planning your financials
As you know, business is a gamble. It is not possible to count on a fixed monthly income. All you can do is chalk up a rough cash flow every month. Therefore, if you are aware of the EMI amount beforehand, it will help you plan your financials accordingly. You will be in a position to make better decisions about purchases and payments.
- Gives you the opportunity to assess multiple options
By calculating the EMI beforehand, you can find a suitable combination of the business loan amount and loan repayment tenure. If you think the EMI is too high, you can change the tenure and loan amount to find the best EMI that caters to your business needs.
- It helps in quick decision-making
It takes merely a few seconds to calculate the EMI on an EMI calculator. When you know the EMI amount you have to pay, you can make quick decisions and not waste time on taking a business loan.
How is Business Loan EMI Calculated?
Business loan EMI is calculated on the loan amount, the total tenure of the loan and the interest rate quoted during loan disbursal. You can come to a realistic figure of your monthly obligations by using an online EMI calculator. The calculator will help you to decide the loan amount and the tenure beforehand. The business loan EMI calculation formula is EMI = P X r X (1+r) n – 1. Here, P stands for the loan amount, R is the interest rate and N is the loan tenure.
Factors affecting Business loan EMIs
If you want to manage your loan EMIs without any trouble, it is critical to understand the factors affecting the EMI amount. So let’s take a look.
For EMI calculations, the loan amount is a critical factor. The principal loan amount is the basis for EMI loan calculations. The higher the loan amount, the higher the EMI, and the lower the loan amount, the lower the EMI. Therefore, it makes sense to tweak the loan amount to make the best decision.
Rate of interest
The interest rate is vital for the EMI amount. It is a competitive factor for financial institutions and lenders because if the interest rate is lower, more customers will be attracted to apply for a loan. Therefore, you must explore the interest rates of all the different financial institutions before deciding. Then, after conducting thorough research, you need to choose the best interest rate for your loan amount. Kindly note that the higher the interest rate, the higher the loan EMI will be, and the lesser the interest rate, the lesser the EMI amount.
The repayment tenure is another key factor affecting your EMI amount. If you go for shorter tenures, the principal loan amount will be spread within those months. Hence, it will result in a higher EMI amount. Conversely, the EMI amount will be lower when you choose longer loan repayment tenures.
Business Loan Amortization Schedule & Calculator
When calculating the EMI loan amount, you cannot forget the amortization schedule and calculator.
The amortization schedule is a table explaining your loan repayment capacity according to the EMI amount. Typically, it has columns for the principal repayment amount, the interest component, the EMI amount, the balance amount, and the principal component. The table is listed for the entire repayment tenure, and the last line shows the total interest amount repaid, and the total EMIs paid. The table helps borrowers understand how their EMI is distributed between the principal amount and the interest. It allows borrowers to decide on repayment tenure to decrease the total interest burden.
Benefits of Accessing the EMI Calculator
- It saves precious time and effort
- With the help of an online EMI calculator, it takes the potential borrower a few seconds to know the exact loan EMI. The calculator helps to save time and effort by eliminating the need to go through cumbersome calculations. Also, it eliminates errors that are part and parcel of manual calculations.
- Quick evaluation of the loan amount and tenure
- Thanks to the EMI calculator, borrowers can instantly check the EMI for different loan amounts and tenures. Therefore, you can make better decisions by knowing which loan amount should be taken for which duration.
- It helps in better financial planning
- Borrowers can plan their finances and repayment when they know the exact loan EMI amount. Business owners must have financial foresight to take their company to the next level, and the online EMI calculator contributes to the process.
On the EMI calculator, you need to enter the loan amount, the repayment tenure and the interest rate. Once you’ve entered these details, the calculator will provide you with an approximate EMI amount. Please note the EMI amount will not include any additional taxes or charges you might have to pay on the EMI amount.
If you miss an EMI payment, you will incur late payment charges and penalty charges. Furthermore, missing EMI payments will adversely impact your future loan eligibility.
Yes, you can reduce the EMI amount by increasing the loan repayment tenure. Also, you can reduce the EMI amount by paying most of the loan amount in a single payment. Then, you can pay a reduced EMI on the outstanding loan amount.
The interest rate remains fixed during the repayment period. You need to decide on the type of interest rate before loan disbursal. You can choose between fixed and reduced interest rates. However, whatever choice you make, it will remain the same throughout the payment period.
Using an EMI calculator before taking a business loan will help you find the most reasonable EMI amount. It will help you maintain financial stability in the future and prevent you from missing your EMI payments. By knowing the amount beforehand, you will be able to make proper financial planning and preparations.
The EMI of a floating or reducing interest rate will change in the future. It changes with the changes in the market rate of interest. If the market rate goes up, the repayment increases. When the rates fall, your repayment falls. However, other than this, the EMI remains the same throughout the payment period.
Business can pay their monthly EMIs through the ECS facility. Banks also accepts post-dated cheques. If you wish to make the payments on your own, you can use Netbanking, credit/debit card, cheques/DDs, standing instructions or other modes of digital payments.
The optimum business loan EMI is deciding on an amount you can comfortably pay. You need to choose a higher down payment and longer business loan tenure to get your optimum business loan amount.