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!
