What is an EMI?
An EMI or Equated Monthly Instalment is a fixed amount of money that a loan borrower need to pay to lender every month as repayment towards his or her loan.
The EMI is paid on a fixed date every month. It can be in form of a Post Dated Cheques (PDC), Electronic Clearing System (ECS) or Standard Instructions (SI).
Component of EMI
The EMIs basically consists of two parts: (a) Principal (b) Interest. The interest is charged on the principal component.
Usually, In the early years of the loan, interest component is higher than principal one. As the loan matures, principal part is progressively paid than interest part.
CapitaWorld Tip: Before availing a loan, a borrower must ask for Amortisation chart from the lender. Amortisation chart is a table, which shows break up of principal and interest.
How EMI is calculated?
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
P = loan amount or principal
N = number of monthly installments
R = interest rate per month
If the interest rate per annum is 10%, then the interest rate will be 10/(12 x 100)
Factors affecting EMI
The EMI is dependent majorly upon on 3 parameters:
1. Loan Amount : With the increase in the loan amount, the EMI also increases.
2. Rate of Interest : is calculated on the basis of your income, credit history, nature of employment, repayment capacity etc.
3. Tenure : Higher tenure means a borrower will have to pay more in form of interest to the lender.
Will the EMI change during the loan tenure?
1. Loan on Floating Interest Rate : If you have chosen floating interest rate while filling loan application form, then your EMI will increase or decrease as per change in market conditions. However, you can instruct your lender to fix the EMI and change the tenure to settle the issue.
2. Early Payment of Loan : If you do some part payment of loan then your EMI will change. Upon customer request, the lender can fix EMI with changing tenure accordingly.
If a borrower is not able to afford EMI, then you must read this article on loan repayment.
Before taking a loan, a loan borrower must understand the concept of EMI. Hope this article has helped you in understanding the same. You can use online EMI calculator to get the exact idea of your future EMI. If you still have any query related to EMI, Loans, and CIBIL, you can get free consultation here.