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Financial Planning

Module Units

Properly planning your EMIs is an important step towards successful financial planning. How? So, to explain, let us take an example of a home loan.

A home loan is a long term decision for borrowers. It therefore pays to keep in mind the following points:

1. Consider the various personal milestones before committing to any lender. - Expenditures on an additional family member, children, etc. should be factored in when deciding on your EMI.

2. Financial institutions offer various schemes to attract potential borrowers. - One must read the fine print of the documentation carefully to understand the effective rate of interest and other terms and conditions of the loan.

3. One should avoid stretching beyond one’s capacity to pay. - Factor in for interest rate fluctuations and other debt obligations, when arriving at the EMI.

4. With uncertainties in life and job, it may be better to repay one’s debt sooner. - Consider the prepayment option if possible, to reduce the debt obligation.

5. Avoid EMI defaults, by keeping in mind the date at which the EMI is to be paid. -Maintain an adequate balance in your account on the relevant date so that the EMI payment is made successfully.

Mathematically, EMI’s are computed using the formula mentioned below.

EMI = (Loan Amount x Interest) x (1 + Interest) ^n/ {[(1 + Interest) ^n] – 1}

Interest = (% rate)/12

n = Loan period in months

Example calculate the EMI for a loan of  ₹10,00,000/- at 9% p.a. interest rate and loan tenure of 15 years.

This EMI of  ₹10,142.67 is a combination of both the interest and principal portion of the loan, to be paid every month.

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