Wednesday 15 August 2012

How to manually calculate loan equal monthly installment


In recent times, credit decisions are getting much easier. However, for this we should be thankful to the Microsoft excel for providing us various complex functions that can be very much helpful in calculating various credit functions like Loan EMIs, etc. But being a credit analyst, a person should be fully aware or should know about how to manually calculate loan “EMI” or “Equal monthly installments”.
In this post, you will learn about how to manually calculate loan EMI without taking help from any sort of pre-defined policy sheet like debt burden sheet. This is very simple for any person who is supposed to be beginner in the field of Credit Risk Management. After reading this post, anyone can measure his or her loan EMI-Equal monthly installment. The only thing he or she must have is the interest rate, which can enquire quite easily from the lending bank or sales person when applying for the loan. In fact, it is also mentioned in the loan documents like “legal finance agreement”, therefore at the time of applying for the loan and before signing of the “legal finance agreement”, you can see the markup rate or you can interest rate. There are many terms which can be used on behalf of markup rate or interest rate. However, most of the banks are using the term “effective APR also known as effective Annualized percentage rate” on behalf of interest rate for the whole year.
So, let’s start, how you can manually calculate your loan “EMI” equal monthly installment. This can easily done through manual table calculate or you can use any sort of excel based worksheet for the calculation.
Here in this particular example we are using the following data for calculating manual EMI:-

Effective APR for the whole year = 25%
Loan Tenor = 1 year or 12 months
Requested or Desired Loan Amount = $100,000.00 or $0.1(Millions)
So in below steps you will learn about how to manually calculate loan EMI based upon the above mentioned information or data.

Step #1
At the first step, you need to divide the interest by 12 months and then further divide it by 100 in order to get value in percentage.
Therefore, we will divide
25/12/100= 0.020833

Step 2
At the second step, you need to add / plus 1 in the value you have obtained in the previous step. Then put the number of tenor in the power. This equation can be look like

(1+0.020833)^12

However, you can also calculate the power manually or the above equation manually. It is not such difficult task to do. Just requires a mathematical calculation. Therefore, in order to calculate the power factor manually. You need to multiply the value obtain by adding 1 to the number of times equal to the values of total tenor or the power value. For the above mentioned equation, the manual calculation of power factor can be like this
(1+0.020833)=1.020833

Then, in order to calculate the power factor, you need to multiply the above value by number of times equal to your tenor.

1.020833*1.020833*1.020833*1.020833*1.020833*1.020833*1.020833*1.020833*1.020833*1.020833*1.020833*1.020833*

The answer will be = 1.280732
Step 3
Now, in this particular step you need to subtract 1 from the above mentioned value. Then you need to further multiply the value obtained in the last of step #2 with value obtained in the step #1 and then divide the answer from the value you have obtained at the start of current step i.e. step #3. The equation can be like this

1.280732-1=0.280732

Then further you need to multiply and divide

1.280732*0.020833/0.280732=0.095044

Step #4
In the last step, you need to multiply the value obtained in the previous step with the loan amount. Here we go, you have manually calculated your EMI amount.

100,000*0.095044=9504

You monthly installment is $9504. Enjoy!