10. Rate Of Interest & EMI Calculations

 10. Rate Of Interest & EMI Calculations

Simple Interest

Simple interest is calculated only on the original principal amount of the loan or investment. It does not take into account any accumulated interest over time. The formula for calculating simple interest is :

Simple Interest = Principal x Interest Rate x Time

Where:

· Principal is the original amount borrowed or invested

· Interest Rate is the percentage rate applied to the principal

· Time is the duration of the loan or investment in years

With simple interest, the interest amount remains constant throughout the duration of the loan or investment.

 

Compoundable Interest

Compound interest takes into account the accumulated interest over time, in addition to the original principal amount. The interest is periodically added back to the principal and subsequent interest calculations are based on the updated principal amount. Compound interest can result in a higher overall interest payment compared to simple interest. The formula for calculating compound interest is

Compound Interest = Principal x (1 + Interest Rate)^Time - Principal

Where :

· Principal is the original amount borrowed or invested.

· Interest Rate is the percentage rate applied to the principal

· Time is the duration of the loan or investment in years

With compound interest, the interest amount increases over time as the accumulated interest is factored into subsequent calculations.

Flat Interest:

Flat interest refers to a fixed interest rate calculated on the original principal amount for the entire duration of the loan. It does not consider the reducing balance or any accumulated interest. With flat interest, the interest amount remains constant throughout the loan tenure. This is different from simple interest, which is calculated based on the original principal only but can vary over time based on the duration of the loan.

 

Floating Interest:

Floating interest, also known as variable interest, is an interest rate that can change over time. It is usually linked to a benchmark rate, such as the prime rate or a reference rate set by the central bank. The interest rate on the loan or investment fluctuates based on the changes in the benchmark rate. Floating interest rates are commonly used in adjustable-rate mortgages or loans where the interest rate may reset periodically according to market conditions. This is different from compound interest, which is a calculation method that takes into account the accumulated interest over time.

Simple Interest and Compound Interest: Simple interest and compound interest are methods of calculating interest and can be used with both flat and floating interest rates. Simple interest is calculated solely on the original principal amount, while compound interest takes into account the accumulated interest over time. Simple interest is typically used in situations where the interest does not compound or accrue on the principal. Compound interest, on the other hand, considers the impact of accumulated interest and leads to exponential growth over time.

 EMI CALCULATION:

To calculate the EMI for a home loan in India, you'll need the following information:

·                     Loan Amount: The total amount borrowed for purchasing the home

·                     Interest Rate:  The annual interest rate charged by the bank or lender

·                     Loan Tenure:  The duration of the loan in months or years

 

Once you have these details, you can use the following formula to calculate the EMI

EMI = P * r * (1 + r)^n / ((1 + r)^n - 1)

Where:

 EMI = Equated Monthly Installment

P = Loan Amount (Principal)

r = Monthly interest rate (Annual interest rate divided by 12 multiplied by 0.01)

n = Loan Tenure in months.

Here's a step-by-step example calculation of the EMI for a home loan:

Loan Amount: Rs.50,00,000

Interest Rate: 8.5% per annum

Next, calculate the EMI using the formula :

EMI = 50,00,000 * 0.00708 * (1 + 0.00708)^240 / ((1 + 0.00708)^240 - 1)

EMI =Rs. 43,359

Therefore, the approximate EMI for a home loan of Rs.50,00,000 with an interest rate of 8.5% per annum for a tenure of 20 years would be around Rs.43,359/-.