Maneesh took a loan of Rs. 9,00,800 from bank at an interest rate of 6% per annum for 10 years. If she has to pay the loan back with the help of equal monthly installments (EMI). Then, the EMI using reduced balance method is (approx):
(Given: \((1.005)^{-120}=0.5496\))
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs. 10,000
By the reducing balance method, the EMI on a loan P at monthly rate r for n months is
\( \displaystyle \text{EMI} = \frac{P \times r}{1 - (1 + r)^{-n}} \)
Here \(P = 900800\), the monthly rate is \(r = \frac{6}{12}\% = 0.005\) and \(n = 10 \times 12 = 120\):
\(P \times r = 900800 \times 0.005 = 4504\)
\(1 - (1.005)^{-120} = 1 - 0.5496 = 0.4504\)
\( \displaystyle \text{EMI} = \frac{4504}{0.4504} = 10000 \)
So the EMI is Rs. 10,000.