How to calculate your education loan EMI in India
Education loan EMIs are calculated on the basis of a simple interest formula. Learn how to calculate your education loan EMI with the correct formula. Find out how much your education will cost you, and avoid surprises in the bank sanction letter.
When you apply for an education loan, in India, you should see what each bank has to offer before you make a choice of lender. While interest rates will play a major role in your decision, the Equated Monthly Installment (EMI) you have to pay back will also matter. There are many different schemes available with different banks.
Students are often confused by EMI loan calculations. This often leads to unpleasant surprises, when your own calculations turn out to be quite different from what arrives printed on the loan sanction letter. This tutorial will take you through EMI calculations for education loans in India.Overview of Education Loan EMI
One thing you should know before you calculate EMI is that it is not dependent only on the principal and interest rates. You will have to factor in the terms that you have signed up for with the bank.
During the time that you are studying, the loan accrues simple interest. After you graduate, depending on the terms of your borrowing, the bank may apply a compound interest on your borrowings. But, this varies from bank to bank. So, do check.
In general, borrowers are expected to pay back the interest during the time they are studying. Afterwards, within six months of graduation or from the time you get a job (whichever comes earlier) you can begin to pay back the principal. Some banks may not give you the six-month moratorium or 'holiday period' after graduation during which you are not bound to repay your loan. Ask your bank about their terms to have a clear picture of your dues during repayment.
The repayment period is also typically between 5 and 7 years, for small loans. But you can also extend the repayment period by speaking with your bank. Note that the cheapest loans will be those that you start paying off right from the outset. Calculating your EMI
There are many EMI calculators out there for education loan. Bankbazaar offers an accurate one, and so does Axis Bank.
Note that the interest rate is calculated based on the MCLR (Marginal Cost of Funds based Lending Rate) plus an additional spread of around 1.35-3 percent (as of 2017).
To calculate the EMI manually, you will need the following formula:
E=P.r.(1+r)^n/(((1+r)^n-1) )
here,
You can also quickly calculate your EMI on your spreadsheet. The function for EMI or loan repayment is PMT. The formula:
= PMT (rate, nper, pv)
where,
The result will come in red or in the negative, since it is a cash outflow for you.
Also, you may be eligible for education loan interest subsidies offered by the MHRD (Ministry of Human Resource Development) under the Central Scheme that provide Interest Subsidy on Education Loan (CSIS). In this case, the EMI that you pay can go down, considerably.
When you use an online EMI calculator, you will find many of them may also give you the option to include the processing fee into the calculation. Do not forget to factor this into your calculations. Processing fees are usually around 0.15 percent of the principal loan amount.
Additionally, do not forget to keep an eye out for other bank charges, like pre-payments, late EMI payment charges etc.
In the following links, I have presented information on education loans offered by various banks -
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The article would have been more effective and easy for any one if one or two examples are given as an illustration, rather than using technical jargons usually seen in financial articles.
For any loan repayment, the borrower should consider the total salary and the essential amount to be spent on basic necessities. Only the residual can be used for loan repayments. One should not over promise for monthly repayment, because later on, the person may have more expenses and less amount to spare for loan repayment. In such situations default occurs.
So while discussing with the lender bank about fixing loan repayment instalments it is always to have a thorough discussion on all aspects and fix an optimum realistic amount of monthly instalment.
In case the borrower gets more earnings, later on, the repayment schedule can be amended discussing with the bank. A foreclosure can also be thought of then.