Loans play a crucial role in fulfilling the aspirations of many Indians, enabling them to realise dreams like owning a home, pursuing higher education, or starting a business. Home Loans provide the means to buy a house, while Business Loans offer financial support to start or expand a business. Additionally, Loans Against Property allow individuals to leverage their property to meet various financial needs. Understanding how these loans work and the associated details is essential for making an informed financial decision.

How do loans work in India?

In India, loans are provided by banks, non-banking financial companies (NBFCs), and other financial institutions. When you take out a loan, you borrow a certain amount of money and agree to repay it over a period of time, along with interest. The amount you borrow is called the principal, and the interest is the cost of borrowing.

How to calculate loan repayments or EMIs?

To calculate your loan repayments or Equated Monthly Installments (EMIs) easily, you can use an EMI calculator. This tool requires you to input the loan amount, interest rate, and tenure, and it will provide you with the EMI amount instantly. This saves you from manually computing the EMI using the formula, which can be time-consuming. Many financial institutions and banks offer EMI calculators on their websites or mobile apps for convenience.

To calculate loan repayments or Equated Monthly Installments (EMIs), you can use the following formula:

EMI= P×r×(1+r)ⁿ  ÷ (1+r)ⁿ−1

Where:

• EMI is the Equated Monthly Installment
• P is the principal loan amount
• r is the monthly interest rate (annual interest rate divided by 12)
• n is the loan tenure in months

For example: If you have a loan of ₹1,00,000 at an annual interest rate of 10% for 5 years, the monthly interest rate would be 10%/12 = 0.00833 and the loan tenure in months would be 5 years x 12 months = 60 months. 

Plugging these values into the formula:

EMI = 100000×0.00833×(1+0.00833)⁶⁰ ÷ (1+0.00833)⁶⁰−1

This calculation will give you the EMI amount to be paid each month.

What is the Total Loan Cost?

The total cost of the loan includes the principal amount, interest, and any additional fees or charges. It's important to consider the total cost when taking out a loan to understand the overall financial commitment.

Also Read: Design your EMI: The Flexibility You Need for Loan Repayments

Dos of Taking Out a Loan

1. Assess Your Repayment Capacity: Before taking out a loan, carefully assess your income and expenses to ensure you can comfortably afford the EMI.

    

2. Compare Offers: Shop around and compare loan offers from different lenders to get the best interest rate and terms.

    

3. Read the Loan Agreement: Thoroughly read and understand the loan agreement, including all terms and conditions, fees, and charges.

    

4. Consider Additional Costs: Factor in additional costs like processing fees, insurance, and taxes when calculating the total cost of the loan.

    

5. Maintain a Good Credit Score: A good credit score can help you qualify for lower interest rates and better loan terms.

Don'ts of Taking Out a Loan

1. Borrow More Than You Can Afford: Avoid borrowing more than you can comfortably repay, as it can lead to financial strain.

    

2. Ignore Interest Rates: Pay attention to the interest rate, as even a small difference can significantly impact the total cost of the loan.

    

3. Forget Additional Costs: Don't overlook additional costs like insurance and taxes, as they can add to the overall cost of the loan.

    

4. Rely Solely on Loans: While loans can be useful, don't rely solely on them for your financial needs. Consider other options like savings and investments.

    

5. Default on Payments: Avoid defaulting on loan payments, as it can negatively impact your credit score and financial health.

Understanding how loans work and the costs involved is crucial for managing your finances effectively. Before taking out a loan, it's important to compare offers from different lenders, consider your repayment capacity, and choose a loan that fits your financial goals. By making informed decisions, you can use loans as a tool to achieve your dreams while managing your finances responsibly.

Godrej Capital offers flexible loan facilities such as Flexi Funds, an Overdraft-like facility, offering borrowers the flexibility to withdraw and repay funds based on their needs and convenience from a certain sanctioned limit. To apply for a loan with Godrej Capital, you can visit here and start with the application process.

Disclaimer: The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com