How is the EMI of housing loan calculated and is it advisable to go for EMI than purchasing outright?

How is the EMI of housing loan calculated and is it advisable to go for EMI than purchasing outright?

The Equated Monthly Installment (EMI) for a housing loan is calculated using a formula that considers the loan amount, interest rate, and loan tenure. Here’s the breakdown

1. Loan Amount: The total amount you borrow from the bank.
2. Interest Rate: The annual percentage rate (APR) charged by the bank.
3. Loan Tenure: The duration of the loan in years.
4. Formula: EMI = P * r * (1 + r)n / ((1 + r)n – 1) where: * P = Loan Amount * r = Monthly Interest Rate (i.e., Annual Interest Rate / 12) * n = Total Number of Loan Payments (i.e., Loan Tenure * 12)
5. Calculation: Let’s say you borrow ₹1,000,000 at an interest rate of 8% for a tenure of 20 years. Using the formula above, your monthly EMI would be approximately ₹11,714.

EMI vs. Outright Purchase:

Deciding between an EMI and outright purchase depends on various factors:

Advantages of EMI:

• Affordability: Spreads the loan repayment over a longer period, making monthly payments more manageable.
• Leverage: Allows you to own a property sooner with less upfront capital.
• Tax Benefits: Interest paid on housing loans is eligible for tax deductions in many countries.

Disadvantages of EMI:

• Total Cost: You end up paying more in total due to accumulated interest over the loan tenure.
• Debt Burden: You remain in debt for a longer period, limiting your financial flexibility.
• Investment Opportunity Cost: The money used for EMIs could potentially be invested elsewhere for higher returns.

Outright Purchase Advantages:

• Lower Overall Cost: You avoid paying interest, making it the cheaper option in the long run.
• Ownership Freedom: No outstanding debt gives you complete ownership and control over the property.
• Investment Potential: Frees up capital for other investments potentially offering higher returns.

Outright Purchase Disadvantages:

• Requires Large Upfront Capital: This may not be feasible for everyone, potentially delaying property ownership.
• Liquidity Challenge: Selling the property may be necessary to access the invested capital.
• Missed Investment Opportunities: While avoiding loan interest, you also miss out on potential returns from investing the same amount.

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