When it comes to securing a commercial property loan, understanding how to calculate your Equated Monthly Instalment (EMI) is essential. The EMI is the amount that you will pay to the lender every month, which includes both the principal amount and the interest charged on the loan. Commercial property loans can be a crucial financial instrument for business owners looking to purchase or develop real estate for business purposes. In this article, we’ll take you through the process of calculating the EMI for a commercial property loan.

Key factors influencing EMI calculation

Before we delve into the calculation itself, it's important to understand the key factors that affect your EMI:

  1. Loan Amount: This is the total amount of money you borrow from the lender. The higher the loan amount, the higher the EMI, assuming the other variables are constant.
  2. Interest Rate: The interest rate on your commercial property loan determines how much interest you will pay on the principal amount. Commercial loans typically have higher interest rates than residential loans because of the associated risk.
  3. Loan Tenure: The loan tenure refers to the duration over which you will repay the loan. This period could range from a few years to several decades. A longer tenure usually results in lower EMIs, but it also means paying more interest over time.
  4. Type of Interest Rate: Some loans are offered with a fixed interest rate, while others may have a floating rate. A fixed rate remains the same throughout the loan tenure, while a floating rate changes based on market conditions.

EMI formula

The most commonly used formula to calculate EMI for a commercial property loan is the following:

EMI=P×r(1+r)n(1+r)n−1EMI=P×(1+r)n−1r(1+r)n

Where:

  • P is the principal loan amount (the amount you borrow).
  • r is the monthly interest rate (annual rate divided by 12 and expressed as a decimal).
  • n is the loan tenure in months.

Let’s break down each element of the formula:

  1. Principal (P): This is the loan amount you borrowed from the bank or financial institution. For example, if you took a loan of ₹50,00,000, this value will be ₹50,00,000.
  2. Interest Rate (r): Commercial property loans often have an annual interest rate of around 8%-12%, depending on the lender and market conditions. To convert this into a monthly rate, divide it by 12 and convert the percentage into a decimal. For example, if the interest rate is 10%, the monthly interest rate would be 1012=0.008331210​=0.00833 (i.e., 0.83%).
  3. Loan Tenure (n): The loan tenure represents the duration over which you will repay the loan, usually expressed in months. For example, if the loan tenure is 15 years, then the value of n will be 180 months.

Example calculation
Let's assume the following details for a commercial property loan:

  • Principal Loan Amount (P): ₹50,00,000
  • Interest Rate (annual): 10%
  • Loan Tenure: 15 years (180 months)

First, we need to convert the annual interest rate into a monthly interest rate:

r=1012=0.00833r=1210=0.00833

Next, we plug these values into the EMI formula:

EMI=50,00,000×0.00833(1+0.00833)180(1+0.00833)180−1EMI=50,00,000×(1+0.00833)180−10.00833(1+0.00833)180

After doing the math (which can be done easily using an EMI calculator or financial software), the EMI comes out to approximately ₹54,410.

Understanding the EMI Breakdown

Your EMI is made up of two parts:

1. Principal Repayment: This is the portion of the EMI that reduces your loan balance.

2. Interest Repayment: This is the portion of the EMI that goes toward paying off the interest charged on the loan.

In the beginning of the loan tenure, a larger portion of your EMI goes toward paying the interest. As time goes on and the principal balance decreases, a larger portion of your EMI goes toward repaying the loan principal.

Tools to help with EMI calculation

While the formula above can help you calculate the EMI, using a loan against property EMI calculator can save you time and reduce the chances of error. Many banks and financial institutions offer free EMI calculators on their websites. You simply need to enter the loan amount, interest rate, and loan tenure to get the EMI figure.

Prepayment and its effect on EMI

One way to reduce your EMI is by making a prepayment or part-payment. This reduces the outstanding loan principal, which in turn lowers your monthly instalment. You can either reduce the tenure of the loan or lower the EMI by making a prepayment. However, it's important to confirm with your lender if any prepayment fees or penalties are applicable.

Conclusion

Calculating the EMI for a commercial property loan is a straightforward process, provided you have all the necessary details: loan amount, interest rate, and loan tenure. By understanding the factors that affect the EMI and using the right tools, you can get a clearer picture of your repayment obligations and manage your finances more effectively. Always ensure that you check with your lender for the most accurate EMI calculation and understand all the terms and conditions associated with your loan.

TAGS

The comments posted here/below/in the given space are not on behalf of Onmanorama. The person posting the comment will be in sole ownership of its responsibility. According to the central government's IT rules, obscene or offensive statement made against a person, religion, community or nation is a punishable offense, and legal action would be taken against people who indulge in such activities.