An EMI is made by a borrower to a lender at a specific time each month, known as an equated monthly installment (EMI). EMIs are frequently used in loans with periods longer than a year to pay off interest and principal each month. Making an EMI payment each month is an efficient approach for borrowers to guarantee that loan repayments are made fully and on schedule. Budgeting for loan repayments can also be beneficial because they are made in a set amount each month. Receiving EMIs from borrowers is a good approach for lenders to ensure they get their loan payments on time.
Did you know? EMI can be a good way to maintain a budget if maintained properly.
What is an EMI?
An EMI is an amount paid by the borrower regularly ( it can be monthly, quarterly, or yearly) against the loan taken by them. Equated monthly installments are used to repay the principal and interest on a loan and are often used for mortgages, auto loans, and other types of loans. The full form of EMI is equated to monthly installments. The payment amount remains the same throughout the repayment period, making it easier for borrowers to budget their monthly expenses. The payment's interest portion decreases with each successive payment, while the principal portion remains the same.
Also Read: What is the Mudra Loan Eligibility Criteria?
How does EMI work?
A fixed payment made by a borrower to a lender regularly (often monthly) for a specific number of years is known as an Equated Monthly Installment (EMI). Principal and interest are often amortized into the monthly payment so that the entire debt is paid off at the end of the loan term.
EMIs are used for both personal loans and mortgages. EMIs are typically calculated for personal loans based on the loan amount, interest rate, and loan tenure. For mortgages, EMIs are typically calculated based on the loan amount, interest rate, loan tenure, and amortization schedule.
However, borrowers should be aware that if they make additional payments towards their loan principal (outside of their regular EMI), they may be required to pay the penalty. If borrowers miss an EMI payment, they may be subject to late fees and increased interest rates.
Equated Monthly Installment (EMI) Formula
The formula for calculating an EMI is:
By using the given formula one can calculate the EMI of the amount, Check the formula here:
EMI = P × r × (1 + r)n/((1 + r)n – 1)
- E stands for EMI
- The loan amount is P.
- N is the number of months, and
- r is the interest rate per month.
For example, if a borrower takes ₹10,00,000 from the bank at 10.5% annual interest for 10 years (i.e., 120 months), what will be the EMI?
Use the above formula and place the above given data:
EMI = P × r × (1 + r)n/((1 + r)n – 1)
then EMI = ₹10,00,000 × 0.00875 × (1 + 0.00875)120 / ((1 + 0.00875)120 – 1) = ₹13,493.
The monthly EMI ₹13,493 for 120 months takes to repay the entire loan amount.
What Are Some Tips for Managing EMIs?
EMI is the amount payable every month by a borrower to a lender under a loan contract. The EMI comprises the loan's interest and a part of the principal amount. The principal amount is reduced with every EMI, and the loan is finally paid when the entire principal is repaid.
The following are a few tips for managing Equated Monthly Installments:
- Try to pay more than the minimum amount due every month. This will help you reduce your overall debt faster.
- You can make lump sum payments towards your loan if you have extra money. This will help reduce your interest payments and help you save money overall.
- If you are having trouble making your EMIs, you can talk to your lender and try to restructure your loan. This will help you make more manageable payments.
- Always make your payments on time. This will help you avoid late fees and penalties.
- Keep track of your loan balance and interest payments to plan your repayments accordingly.
Following these tips will help you manage your Equated Monthly Installments better and help you save money eventually.
Benefits of an EMI
An EMI is an amount paid by the borrower regularly (it can be monthly, quarterly, or yearly) against the loan taken by them.
- EMIs have several benefits for borrowers. First, they make it easier to budget for loan repayments. Borrowers know exactly how much they need to set aside each month to make their loan payments, making it easier to manage their finances.
- EMIs can help borrowers pay off their loans more quickly. By making fixed monthly payments, borrowers can pay down their principal balance more quickly, saving on interest costs over the life of the loan.
- EMIs can make it easier to qualify for a loan. Borrowers who can show that they have a history of making regular EMI payments are more likely to be approved for a loan than those who do not have such a history.
- EMIs can help to build credit. Borrowers who make their EMI payments on time and in full can improve their credit scores, making it easier to qualify for future loans.
- EMIs can provide peace of mind. Borrowers who are worried about making their loan payments on time can relax knowing that their payments are fixed and will not change monthly.
Disadvantages Of EMI
An EMI is an amount paid by the borrower regularly ( it can be monthly, quarterly, or yearly) against the loan taken by them. EMIs are usually paid monthly but can also be paid fortnightly or weekly in some cases. The tenure of an EMI is the period over which the borrower must pay back the loan to the lender. The tenure can range from a few months to a few years.
Following are the disadvantages of EMI
- The main disadvantage of an EMI is that it can be quite expensive. This is because the borrower must pay interest on the entire loan amount, even if they have only borrowed a small amount. This can make it difficult to repay the loan, especially if the borrower is on a tight budget.
- Another disadvantage of an EMI is that it can be inflexible. This is because the borrower must make the same payment each month, regardless of their financial situation. This can be a problem if the borrower's income varies monthly, as they may need help to make the payment in some months.
- EMI can also be a disadvantage because it can take a long time to repay the loan. This is because the borrower is only making small monthly payments, which means it will take longer to pay off the loan. This can be a problem if the borrower needs to access the money sooner rather than later.
In a nutshell, equated monthly installment (EMI) is an amount given by a borrower to a lender at regular intervals against the loan taken. EMI payments include both the principal loan amount and the interest charged on loan. The principal portion of the EMI payment goes towards repaying the loan amount, while the interest portion goes towards paying the interest charged on loan. EMI payments are typically made through post-dated cheques or auto-debits from the borrower's bank account.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.