EMI or Equated Monthly Installment has grown into an important part of the modern financial life. EMI helps you to buy expensive goods at a manageable price, be it a smart phone, car or home. When you know EMI, you will be able to spend your money wisely and make informed borrowing choices.
What Exactly is EMI?
EMI (Equated Monthly Installment) is a fixed amount of money that a borrower pays to a lender at a specific day on a monthly basis. The loan is repaid in a predetermined number of years with the help of EMIs which allow paying the principal and interest on a monthly basis.
Official Definition
Equated monthly installment (EMI) is a fixed amount of payment paid by a borrower to a lender on a predefined date every calendar month. The loan is decided to be paid in full within a specified number of years through the use of equated monthly payments to settle the loan together with the interest accrued at the time.
How Does EMI Work?
The act of splitting a loan into a series of fixed payments over a period is known as the amortization and that is how EMI is performed. The procedure is as follows:
Loan Disbursement
The lender gives you or the seller the entire sum of the loan.
EMI Calculation
The amount of payment per month that you are to pay is fixed depending on the loan amount, interest rate, and tenure.
Regular Payments
You pay it every month on a specified date.
Interest-Principal Split
Each EMI payment covers interest at that period of time and a part of the principal.
Loan Completion
Loan would be fully paid with interest once all EMIs have been paid.
Components of EMI
Any EMI payment is a combination of two elements:
Principal Amount
The exact amount of the loan you had borrowed. This percentage is increasing with each EMI.
Interest Amount
The cost of money is expressed in the percentage of the value of the unknown debt.
Variation of EMI Composition with Time
How is EMI Calculated?
EMI is calculated with a common mathematical formula that will ensure your loan is well repaid within the choice of time.
Practical Example
Types of EMI
Various types of EMI structure suit or fit the preferences and financial requirements of various borrowers:
Fixed EMI
Remains constant throughout the loan term. the most common with auto and home loans.
Floating EMI
Variations in relation to fluctuations in interest rates. found in variable-rate loans.
Step-up EMI
Starts with low EMIs and increases progressively as your income increases.
Step-down EMI
Shaves off the overall interest by placing a large EMIs and reducing them progressively.
Advantages of EMI
Affordability
Disperses the expense across the time, and expensive assets and products become available.
Financial Planning
With fixed monthly payments, financial planning and budgeting is made easier.
Credit Building
Regular EMI payments increase the credit scores and help in building a good credit history.
Immediate Access
Get assets immediately without necessarily saving all the amount.
Important Before-Taking-EMI-Considerations
Affordability Check
Once you have had the expenses covered, be sure that your EMI does not exceed 40-50 percent of your monthly disposable income.
Hidden Charges
Check in GST, foreclosure charges, processing charges and other undisclosed charges that increase the effective interest rate.
Tenure Impact
The longer tenure will give it a higher total interest rate with a lower EMI. A less long tenure will have a higher EMI and lower total interest.
Default Consequences
The default of payments of EMIs may lead to the imposition of penalties, damage to credit rating, or repossession of assets in secured loans.
Common Loans That Use EMI
There are numerous types of loans, which are covered by EMI. The most common ones are the following:
Home Loan
Car Loan
Education Loan
Personal Loan
Consumer Durable
Components of EMI
Any EMI payment is a combination of two elements:
Principal Amount
The exact amount of the loan you had borrowed. This percentage is increasing with each EMI.
Interest Amount
The cost of money is expressed in the percentage of the value of the unknown debt.
Variation of EMI Composition with Time
Smart EMI Planning Tips
Use EMI Calculators
When committing a loan, it is always necessary to use online calculators in order to have a full understanding of the financial impact.
Compare Lenders
Never accept the first offer. Compare rate of interest charged by different lenders, application fees, and other expenses.
Consider Prepayment
You should attempt to make partial prepayments in order to reduce your principal and save interest.
Maintain Emergency Fund
In a case of financial instability to avoid default then save three to six months of EMI payments as an emergency fund.
Read Fine Print
It is essential to read all conditions and terms attentively with special attention to those that relate to the foreclosures process and the late payment charges.
Frequently Asked Questions
In case of further defaults the lender can initiate recovery, which in the case of secured loans can involve seizing assets. In most cases, the default on EMI will lead to a late payment charge and a poor credit score.
The amounts of EMI are usually pegged against the loan term. However, you may under certain circumstances restructure your loan or increase your EMI (by reducing the loan term) with certain charges charged by certain lenders.
No fee Although the interest is often already paid by the manufacturer or retailer or charged as part of the product price, EMI also implies that you do not pay extra interest. Processing fees or GST could also apply in some cases.
By paying your EMI punctually it means that you are a good creditor, and this increases your credit score. Late payments however, significantly reduce your credit score. Moreover, the ratio of credit utilization can be affected by a number of EMIs.
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