Features of the Equated Monthly Instalment
What is an Equated Monthly Instalment (EMI)?
Equated monthly Instalment (EMI) is the payment made by borrower to the lender at a specified date every month until the loan is paid off in full.
EMI has two components:
- Principal amount and
- Interest amount
In the initial years of the loan tenure, the interest component constitutes the major portion of the EMI payment. As the tenure progresses, the interest component decreases and the principal component forms a higher percentage of the monthly payment.
Understanding EMIs is important as it helps you take informed financial decisions. Our EMI calculator is an easy tool to calculate the EMI along with the interest and prinicipal component.
How is the Equated Monthly Instalment (EMI) calculated?
EMI is calculated by formula:
E = EMI
P = Principal Loan Amount
r = rate of interest calculated on monthly basis i.e. r = Rate of Annual interest/12 X100. For example, If rate of interest is 12% per annum, then r = 12/ (12X100) =0.01
n is for loan tenure / duration in number of months
If Raj borrows ₹50,00,000 from the bank at 12% annual interest for a period of 20 years (i.e. 240 months), then EMI = ₹50,00,000 X 0.01 X (1 + 0.01)240 / ((1 + 0.01)240 – 1) = ₹55,054. i.e., Raj will have to pay ₹55,054 for 240 months to repay the entire loan amount. The total amount payable will be ₹55,054 X 240 = ₹1,32,13,034 which includes ₹82,13,034 as interest toward the loan.
What are the benefits of EMI?
EMIs are a boon to people who depend on a steady source of income and prefer not to pay an upfront lump sum amount. Following are some of the advantages of EMIs:
- Affordability: EMIs lets you make payments in instalments instead of making an upfront lump sum payment, thus making the purchase of a home, car and/or other goods affordable.
- Flexibility: EMI provides you with the flexibility to determine the instalment amount and tenure best suited to your personal financial position and disposable income.
What are the disadvantages of EMI?
Even though an EMI provides freedom to the buyer by offering affordable solutions. There are several costs attached to it. Following are some of the disadvantages of EMIs:
- Long Term Debt: An EMI scheme is a financial obligation which requires recurring payments till the entire loan is paid off.
- Interest payment: There is an additional cost in terms of interest component.
- Prepayment penalty: Several institutions do not allow prepayment and even if they do there will be serious penalties that you will have to pay for prepayment.