How do banks reach the EMI figure of a home loan if I have no other ongoing loans?
Banks check your financial credentials including your credit score. Your income, age, retirement age and any monthly financial obligations help the bank decide whether to offer you a loan or not. Once the bank considers you as eligible the final home loan amount is calculated using the formula Monthly Income X 50% - minus other liabilities if any / per lakh EMI.
An Equated Monthly Instalment (EMI) is usually a fixed amount of money that you need to pay your bank or lender every month as repayment of a loan taken, until your loan is totally repaid. It is essentially made up of two parts, the principal amount and the interest on the principal amount, divided across each month of the loan tenure. This could be done though post-dated cheques issued in favour of the lender or by providing auto-debit instructions to your bank for the same. Here’s the formula to calculate an EMI:
EMI = [P x I x (1+I)^N]/[(1+I)^N-1], where P is the loan amount or Principal, I is the Interest rate per month. [To calculate rate per month: if the interest rate per annum is 14%, the per month rate would be 14/(12 x 100)], and N is the number of instalments.
Or, just use our handy EMI calculator- [insert link to EMI calculator]
If you’d like to know more, read this post - https://blog.bankbazaar.com/what-is-emi-and-how-is-it-computed.