If you are planning to take a loan to fund your purchases or meet financial obligations, estimating the monthly instalment you are likely to pay is crucial. It will help you make more informed investment decisions that closely align with your financial capacity.
Here is where a monthly EMI calculator comes into the picture. It is an online tool designed to make EMI calculations simpler. All you need to do is enter a few details like the loan amount, the interest rate and the tenure. The EMI online tool will display an estimate of your monthly instalment almost instantly.
Now, despite the various benefits, the EMI calculation tool comes with certain key limitations you must keep in mind as a potential user. In this article, we are going to explore these limitations in detail and why you should exercise caution when relying on such a tool when making financial decisions.
Limitations of Online EMI Calculators
Although most monthly EMI calculators offer instant estimations and user-friendly interfaces, they often tend to oversimplify the complexities associated with loans. As a result, they come with certain limitations that you must be aware of before relying on them.
1. Lack of Customisation
Loans are generally not one-size-fits-all. In fact, many borrowers have loans with customised structures like step-ups or balloon payments. Standard EMI online tools often do not account for such complex or different structures. This limitation can often lead to erroneous calculations, making them unreliable for decision-making purposes.
For example, let us assume that you opt for a home loan with a step-up feature. Under this specific structure, your monthly instalments will increase every year, corresponding to your increase in income. However, home loan EMI calculators use a basic mathematical formula that does not account for the step-up. So when you use such basic home loan EMI calculators, you may end up with a skewed picture of your actual repayment amount and schedule.
2. Generic Interest Rate Assumptions
The interest rates on loans can vary depending on the lender, your eligibility and the broader economic situation. Most EMI online tools use default interest rates, which are often outdated. Some calculators, however, allow you to input the rates manually.
In either case, using incorrect or outdated figures can lead to significant discrepancies when calculating your monthly obligations, since EMI calculations depend heavily on the interest rate. Whether you are using a car loan EMI calculator or a personal loan tool, you must always ensure that you input the exact rate your lender offers to get the most accurate results.
3. Excludes Additional Charges and Fees
A typical monthly EMI calculator only focuses on the principal and interest components of a loan. The tool ignores other key costs and charges associated with it, such as processing fees, documentation charges and insurance premiums. These additional fees can get quite significant, especially if you opt for high loan amounts.
For example, a home loan EMI estimate might look manageable on paper, but the actual EMI could be higher due to these hidden expenses. Similarly, car loan EMI calculators may not include additional charges like insurance costs or registration expenses. Such a limitation can lead to budget miscalculations and can stress your finances.
4. Does Not Consider Prepayment or Foreclosure
Lending institutions often allow you to make partial prepayments and foreclosures to reduce the financial impact of a loan. These actions often change a loan’s overall cost and tenure. For example, if you choose to pay off a part of the loan earlier than the original schedule, the entire EMI calculation will change.
Standard monthly EMI calculator do not have the ability to account for prepayment or foreclosure of a loan. This makes them unsuitable for certain loans, especially home loan EMI cases, where prepayments are common.
5. No Amortisation Schedule
Loans generally use the reducing balance method to calculate interest. In this method, the interest outgo is higher in the initial years compared to the principal. This slowly changes with the interest component reducing and the principal component increasing as the years go by.
While most EMI online tools provide an amortisation schedule detailing the principal and interest outgo for every month till the end of the tenure, there are certain calculators that may not provide that distinction. If the monthly EMI calculator does not reflect the amortisation schedule, you may misinterpret how much of your instalment goes towards the interest and principal components, respectively.
6. Does Not Account for Credit Score or Loan Eligibility
One of the key factors that influence the loan amount, the interest rate applicable and the repayment tenure is your credit score. The higher your credit score, the more relaxed the loan terms are likely to be and vice versa. However, online EMI tools do not factor in your creditworthiness. This makes them less personalised and potentially inaccurate when estimating monthly instalments.
For example, a car loan EMI calculator may show an attractive monthly instalment for a certain loan amount. But in reality, you may not qualify for that loan or may have to pay higher interest rates due to a low credit score. Similarly, home loan EMI calculators might suggest a monthly repayment amount without checking if you are eligible for the full loan amount you input.
7. May Not Reflect Offers or Discounts
Banks and non-banking financial institutions often run promotional offers with discounted rates or waived charges for certain borrowers. EMI calculation tools rarely reflect such offers or discounts unless you manually input them. This essentially means that your equated monthly instalments might not take into account potential interest rate reductions or processing fee waivers, which may skew your calculations and lead to inaccurate financial decisions.
Conclusion
While EMI online tools are helpful for preliminary planning, they are not entirely foolproof. Since they are designed to have a simplified structure focusing on convenience, they often fail to account for dynamic variables such as changing interest rates, prepayment options or hidden costs.
Relying solely on a monthly EMI calculator may lead to misjudgment in financial decisions. Therefore, whether you are using a home loan EMI tool or a car loan EMI calculator, it is advisable to always cross-check with your lender for the most accurate details.
Source: FG Newswire