EMI CALCULATION WITH INTEREST COMPOUNDED 1/2 YRLY.

Mr. Dhir,

Though I had replied to this question of yours through a direct mail, I am still writing the answer here so that the information can help someone else as well.

Interest compounded half-yearly means that you will end up paying more interest than you could have actually paid if the interest was compunded annually. In most of the cases interest is compounded annually.

EMIs are calculated on reducing basis. As you pay EMIs, the principal reduces hence the interest amount too reduces.

If we calculate compound interest on flat half-yearly basis, your EMI for same loan should come as Rs.10,826. Your bank has calculated EMI on reducing basis only, the way world calculates. Interest rate of 9.25% is quite competitive too. The terms might be obsolete or there is some misunderstanding.



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Though most of us know the difference between simple & compound interest and its application, I elaborate for the sake of people who may not be knowing it.

Simple interest is application of interest on principle/loan amount only (reducing/outstanding balance).  Compound interest is application of interest on total outstanding balance (including interest).

Regarding compounding of interest, it means application of compound interest.  If in your case it is compounded half yearly, it's good.  These days, it is normally compounded on monthly basis. It may be so in your case too - I suggest you check the actual position with your bank; it is quite possible that the terms & conditions or general covenants handed over to you may be obsolete.

Pankaj,

The problem lies somewhere in calculation or terms. If we consider Mr. Dhir's parameters, even CarWale's EMI Calculator comes up with an EMI of 8615 rupees. As far as I know, our calculator doesn't calculate on half-yearly compunded basis. The calculator calculates on par with any other bank calculator.



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Banwari, the EMI calculator of CarWale calculates/compounds interest at monthly intervals.  I say so because I've calculated the figures manually with the help of Excel - taking into account the said loan of Rs.413331/- repayable in 60 months/installments at an interest rate of 9.25% compounded on monthly intervals.  The EMI derived by me is in line with that of EMI calculator of CarWale, i.e. it comes to 8625/- p.m. as per my calculation.

Dhir, I would recommend you to reconfirm with the Bank the terms & conditions of the loan - especially the rate of interest & its compounding.  I suggest so for the following two reasons:

1. Rate of Interest (RoI) of 9.25% appears to be on lower side as compared to the present market scenario. Presently, for 5-year repayment, ICICI Bank offers car loan at 10.75% and State Bank at 11%.  Co-op. Banks are known to charge higher RoI in the range of 12.5% to 14%.
2. Compounding of interest by all the banks is done on monthly basis (same as done by CarWale EMI Calculator).  Co-op. banks are known to be doing it on daily basis/product (monthly repayment).

You are right Pankaj,
The banks calculate the interest on a monthly basis, then only it can be reducing balance.

Saroj,

In the case of Simple Interest (almost obsolete now), interest is applied only on the loan/principle amount and not on interest - interest A/C is maintained/calculated separately. So, in such cases, interest application is necessarily on the reducing balance, as the loan amount reduces with each repayment/monthly installment - while the interest gets accumulated elsewhere & is normally repayable after repayment of principle amount.

In the case of Compound Interest, interest is applied on loan amount & interest amount - no separate A/Cs are maintained.  Therefore, interest application is not necessarily on reducing balance, as the repayment/monthly installment may be lower than the interest applied - resulting in increase of loan outstanding.  This actually happens during the initial repayment period & especially in the cases where repayment schedules are longer (lower installments).

There are two terms banks normally use "falt rate" and "reducing balance" Normally banks calculate interest rates on reducing balance only. In reducing balance the interest rates get compunded on a monthly basis. For a similar amount and term, the flat rate is equivalent to double of the reducing rate. (say a flat rate of 10% is equivalent to reducing rate of 20%, if you calculate the respective EMIs)

can u help us in calculating equated monthly instalment of loan by our self only.

Try this LINK (EMI Calculation).