What is EMI?
What is EMI?
Standard Whatsapp DP – For a person from a middle class or poor class family, taking a loan is an integral part of his life. This loan is taken for a specific purpose like to buy a house, to buy a car, to send children abroad for education, to get someone in the family married or for a medical emergency, etc. Loans help us achieve such important goals in life.
“What is the EMI” is the first question that comes to mind whenever a person thinks of taking a loan. EMI means that whatever amount is borrowed as a loan, that amount has to be returned to the lender with interest and whatever amount is fixed to be given to the lender every month is called EMI.
Let us understand in detail what is EMI and how does EMI work.
What is EMI (Equated Monthly Installment)? EMI is defined as the amount paid by a borrower to a lender on a specified date in each calendar month i.e. the amount paid to the lender each month is called EMI.
What factors affect EMI?
The factors affecting EMI are as follows:
Principal Borrowed: This is the total loan amount borrowed by the individual.
Interest Rate: This is the interest rate charged on the amount borrowed.
Loan Tenure: It is the time limit for loan repayment which is decided by the consent of both the borrower and the lender.
Fixed or floating loan type: If the interest rate is floating, the rest of the components affect the EMI.
Note: In a fixed type loan, the EMI amount remains the same throughout the loan tenure but, in a floating type loan, the EMI amount may fluctuate with the change in the interest rate.
What is amortization schedule?
Amortization schedule is a comprehensive table that outlines the entire loan details and EMI payments. It shows the borrower how much of each EMI amount is being paid as principal and how much is being paid as interest till the loan taken by you is fully repaid.
The amortization schedule helps you understand how your loan progresses during the loan tenure and the details it covers are as follows:
- EMI amount
- principal loan
- Interest cost of each EMI payment
How to calculate loan interest? There are two ways to calculate EMI and they are as follows:
1. Flat Rate Method
In this method, the principal loan amount and the interest charged on it are added. The amount is then divided by the tenure fixed for loan repayment and then multiplied by the number of months in a year.
Example of Flat Rate EMI
- Assume you have taken a home loan of ₹10,00,000 at an interest rate of 8% for 10 years.
- Principal amount – ₹10,00,000
- Time limit – 10 years
- Interest Rate – 8%
- Your EMI is calculated using the flat-rate method as follows:
- (₹10, 00,000 + (₹10, 00,000 x 10 x 0.08)) / (10 x 12)
- After solving this your EMI amount per month will come to ₹15,000.
2. Reducing Balance Method
The formula to calculate EMI using this method is as follows:
(P * I) * ((1 + r)n)/ (t * ((1 + r)n) -1) [(P x I) x ((1 + r)n)/ (t x ((1 + r) n) – 1)]
- P – is the principal amount borrowed
- I – The rate of interest (annual) is
- r – is the periodic monthly interest rate
- n – is the total number of monthly payments
- t – is the number of months in a year
Example of Reducing Balance EMI
Let us see an example for calculating EMI using this method.
((₹10, 00,000 x (0.08)) x (1 + (0.08 / 12)) 120) / (12 x (1 + (0.08/12))) 120 – 1
After solving this, the EMI amount to be paid by the borrower every month will be ₹ 12,133.
Note: The EMI amount in the reducing balance method is lower as compared to the flat rate method. In flat rate EMI calculation, the principal loan amount remains constant throughout the loan tenure. On the other hand, in the reducing balance method, the EMI is calculated on the monthly reduced principal amount. This suggests that the reducing balance method may be a more cost-friendly option for borrowers.
What is EMI calculator?
EMI calculator is an online tool which calculates your EMI amount. Along with this, it also provides EMI comparison for different loans and tenures. This calculation is based on three factors: loan term, interest rate and loan amount.
The features and benefits of EMI calculator include the following points:
It calculates the EMI amount that you have to pay to the lender every month.
Once you know the EMI amount, you can plan your budget according to the EMI amount with the help of EMI calculator.
With the help of EMI calculator, you can find out the total amount you have to pay and the total interest you will have to pay on the principal amount.
This helps you find out the best loan tenure for you.
What are the Different Types of Loan Interest Rates?
There are two types of interest rates which are as follows.
Fixed Interest Rate: In this type, the interest rate remains the same throughout the tenure of the loan. Hence, the EMI also remains the same throughout the tenure. Typically, fixed interest rates are 1% to 2% higher than floating interest rates. Since the interest rate does not change, the biggest advantage of a fixed interest rate is that you have a clear idea of your future EMIs till the time your loan is repaid.
Floating or Variable Interest Rate: Unlike the fixed interest rate, in this type the interest rate is floating or variable depending on the market trends. Since the floating interest rate is based on the base rate offered by the lending institutions, it automatically changes when the base rate changes.
Fixed interest rate or floating interest rate? Which of these interest rates is better?
Fixed interest rate keeps your EMI amount the same throughout the loan tenure. Therefore, if you do not want to take the risk of rising interest rates and want a sense of certainty about your monthly payments, then a fixed interest rate is best for you.
On the contrary, if your loan is for a longer tenure, such as 20 to 30 years, then it is advisable to choose a floating interest rate. Also, when you know that the base rate is going to remain constant till your loan tenure or the base rate may come down during your loan tenure, it would be best for you to go for a floating rate.
This way, you can plan for prepayment of your loan and reduce the interest charged on the loan, thereby saving more money in the right way.
Does the EMI change during the loan tenure?
Your EMI is calculated based on factors such as loan amount, tenure and interest rate.
The EMI you pay may vary during the loan tenure under certain circumstances, which are as follows.
Loan prepayment: Some banks allow you to make a lump sum payment of a part of your loan amount, much before your scheduled repayments. If you prepay a part of your loan amount, your principal amount gets reduced. Thus your interest amount gets reduced and the EMI amount payable also gets reduced.
Floating Interest Rate: In loans with fixed interest rate, the EMI amount remains unchanged. However, if you have opted for floating interest rate, then the interest rate changes as per the market conditions. Thus the EMI amount payable also changes during the loan tenure.
Progressive EMI: Some banks and lending institutions give you the option of making progressive EMIs. Here you have to pay a fixed EMI for a fixed tenure and subsequently, the payment amount increases. This type of facility is generally applicable for long term loans.
frequently Asked question
What is the meaning of EMI? The full form of EMI in Hindi is Equated Monthly Installment.
What is the difference between EMI and loan? Loan is the amount that a bank or lending institution lends to you under which you sign an agreement with them stipulating that you will repay the borrowed amount with interest over a specified period of time . Whereas EMI is the monthly installment that you pay to service your loan over a specified loan tenure at a specified rate of interest.
EMI is good or bad? EMI is neither inherently good nor bad. EMI gives you the convenience of repaying the loan in convenient and easy instalments. However, you cannot ignore the fact that by way of EMI, you are paying more than what you have actually borrowed. There are costs attached to it like interest and processing fees. Additionally, if you default on your EMI payment in any month, it hurts your credit score resulting in increased interest rate as a penalty. have to pay. Hence the EMI facility is beneficial as long as you make timely payments every month during the loan tenure while enjoying the loan benefits.
Is GST applicable on Personal Loan EMI? – No, GST is not applicable on loan repayment and GST is also not applicable on interest paid on loan. However, GST processing fee and other charges as applicable by your lender are applicable.
What if I fail to pay the EMI on time? If you fail to pay your EMIs on time, it can hurt your credit score. Although you are not considered a defaulter if you miss paying your EMI once, but if you miss paying EMI for three consecutive times, banks issue reminders to you. If you don’t even respond to the reminders, banks levy late penalty charges and may also send you notices.
What is No Cost EMI? “No Cost EMI” is a type of EMI in which you do not pay interest on the principal amount. In this the loan is divided by the length of the loan term. This facility is usually offered by retailers/online retailers or marketplaces.
What is minor and major default? – If you pay your defaulted EMI within 90 days, it is considered a minor default. But if you fail to make EMI payments for the last 90 days or more, it is considered a major default and your loan account is classified as a Non-Performing Asset (NPA).