What is an EMI?

An Equated Monthly Installment (EMI) is a fixed payment made by a borrower to a lender on a specified date each month. It is a common financial term used in loan repayments, allowing borrowers to pay off any type of loan in manageable monthly installments. The amount of EMI is determined by three main factors:

1. Principal Loan Amount: This is the total amount borrowed from the bank or NBFC.
2. Rate of Interest: The interest rate, which can be either fixed or floating, is set by the lender based on the borrower’s creditworthiness and market conditions.
3. Tenure: This refers to the duration over which the loan must be repaid.

When a borrower takes a loan, the repayment is structured into equal monthly installments that cover both principal and interest, ensuring the loan is fully paid off by the end of the tenure.

Do the EMI amount changes during the loan tenure?

The EMI amount can change based on the borrower’s choices regarding the loan structure:

Floating Interest Rate:If the borrower opts for a floating rate, the EMI may vary as the lender adjusts the interest rate.

Prepaying the Loan Amount: If the borrower decides to prepay part of the loan, the EMI can be recalculated, often leading to a reduction in the monthly payment.

Opting for Progressive EMIs: Some lenders offer a structure where the borrower starts with smaller EMIs, which increase over time, making it easier to manage early payments.

How the EMI is calculated?

The calculation of EMI is based on the following formula:

EMI = P×r×(1+r)^n / (1+r)^n-1​

Where:

• P = Principal loan amount
• r = Monthly interest rate (annual rate divided by 12)
• $n$ = Loan tenure in months

What are the extra costs borrowers have to pay by opting for EMIs?

Borrowers should be aware of additional costs associated with EMIs:

• Interest Rate: The total amount paid will exceed the principal due to interest.

• Late Fees: Missing an EMI payment can result in penalties, which may also negatively impact the borrower’s cibil score.

Is EMI a good option for loan repayment?

EMIs are generally considered a convenient option for loan repayment. They provide a structured payment plan that helps borrowers manage their finances effectively. With many banks offering flexible EMI terms, repaying loans has become easier than ever.