Posting Point
Each calendar month, the borrower makes a set payment to the lender known as an Equated Monthly Instalment (EMI). Equated monthly installments are applied to both the interest and the principal each month, allowing the loan to be paid off in full over a set number of years.
The borrower makes a regular payment (usually monthly) to the lender over the course of several years in the most common forms of loans, such as home Loans, Auto Loans, and Student Loans, with the goal of paying off the loan.
What is an Equated Monthly Instalment and how does it work?
An EMI allows the borrower to pay a set amount toward the loan each month.
Borrowers profit from an EMI since they know exactly how much money they’ll need to pay toward their loan each month, making personal budgeting easier. Lenders benefit because they can count on a consistent, predictable income stream from loan interest.
How is EMI calculated?
The following formula is used to compute an EMI:
(P×I)×((1+r)n)/(t×((1+r)n)−1), where
P= Principal amount
I= Annual Interest rate
r= periodic interest rate
n= Total number of monthly payments
t= Number of months in a year
The EMI payments are directly proportional to the loan amount and interest rates, and inversely proportional to the loan length when the three governing factors are taken into account. The EMI payment increases in proportion to the loan amount or interest rate, and vice versa. Though the overall interest to be paid rises as the loan term lengthens, the EMI payments fall. If you are planning to take a home loan check the interest rate using the home loan EMI calculator.
Factors affecting your EMIs:
Your EMIs are influenced by three primary factors:
Loan amount:
It’s the amount you borrow, and it’s the main determinant of your EMI. The EMI grows in proportion to the loan amount.
Interest Rate:
Another important aspect that affects your EMIs is the interest rate on your loan. The interest rate is directly proportionate to the EMIs. Interest is calculated by banks and financial institutions depending on a variety of factors such as your income, repayment capacity, credit history, market conditions, and so on.
Tenure:
The third aspect that influences your EMI is your credit score. In general, a longer-term equates to lower EMIs and vice versa. However, a longer loan term entails a greater overall interest expense at the end of the loan term.
Does the EMI change during the tenure?
In most cases, the EMI does not alter during the course of the term. However, there are some circumstances in which the EMI may alter, such as:
Floating interest rate:
If you choose a floating interest rate, the rate will fluctuate according to market conditions. When interest rates fall, EMIs reduce as well.
Fixed interest rate:
If you pay off a portion of your loan early, your EMI will vary. When you prepay, the principal amount decreases, which lowers the EMIs if you want to keep the original term.
If you choose a fixed-rate loan, your EMIs will not alter for the duration of the loan. So, if you’re taking out a loan, especially one with a greater loan amount, such as a Home Loan or a Loan Against Property, compare the EMI to the total interest outflow over the loan term and decide which option is best for you.
- Higher Equated monthly installments and shorter tenure- In the long term, you will save money on interest payments.
- Higher tenure and lower Equated monthly installments- maintain a sustainable cash flow over the loan term
