I have a scenario where there are 2 loans that can be provided (assuming I am providing the loan). The principal amount is the same, 30,000 in case of both the loans. The interest is also same at 17%. The duration of one loan is 12 months and the other one is 24 months. The loans will be repaid with Equated Monthly Installments (EMI). The EMI for the 12 month loan is 2736 and the EMI for the 24 month loan is 1483.
In both cases, I have the option to re-invest the EMI at the same rate and same tenor. I want to understand which of the above loans will give me more returns and how to calculate the returns.
I have done a simple calculation but I am not convinced. For the 12 month loan I have taken the time in months for my principal to come back and then re-invest for another 12 months at the same rate. At the end of the 24 months, I gain 2*1 month EMI + Interest portion of EMI for 1 month. In this calculation, the 12 month loan re-invested is giving 5512 and the 24 month loan is giving 5598; which implies that the 24 month loan is more profitable. I am probably not taking in the condition that the EMIs could be re-invested on monthly basis.
Some help in understanding that and the actual process of calculation would be much appreciated.