If you borrow money on a frequent basis, you’re probably familiar with the term EMI. An Equated monthly installment plan can help you figure out how much you’ll have to pay each month to pay off a loan. It also makes your personal budgeting procedure go more smoothly. This is because you know exactly how much money you need to save each month to pay off your debt. Here’s a detailed explanation of what EMI is and what you need to know about it.
- 1 What exactly is EMI?
- 2 What is an Equated Monthly Installment (EMI) and how does it work?
- 3 What is the EMI calculation formula?
- 4 The formula for a flat rate
- 5 Balance-reduction formula
- 6 What elements have an impact on EMI?
- 7 1. The amount of the loan
- 8 2. The rate of interest
- 9 3. The term of the loan
- 10 Final thoughts
What exactly is EMI?
The Equated Monthly Installment (EMI) is a fixed monthly payment made by a borrower to a lender. The loan principal and interest are usually included in the EMI. This amount is paid by the borrower every month in order to pay off the loan at the conclusion of the loan term.
Essentially, EMI gives you peace of mind because you’ll know how much you’ll have to pay ahead of time. This is particularly significant for people seeking loans as salaried employees.
What is an Equated Monthly Installment (EMI) and how does it work?
Variable payment options are not the same as EMIs. If the borrower chooses, he or she can make greater payments on a variable payment plan. Borrowers with Equated monthly investment plans, on the other hand, can only make a fixed monthly payment. EMI shows a borrower how payments might be spread out evenly over the loan term. It also allows lenders to anticipate a consistent stream of money from loan interest.
What is the EMI calculation formula?
For the most part, there are two ways for determining EMI. They are as follows:
The formula for a flat rate
You can figure out the flat rate by summing the principal and interest on the loan. After that, multiply the value by the number of months times the number of periods. The interest is always charged on the overall loan amount, regardless of how much you pay in principal. The flat rate formula is as follows:
EMI = (Principal + Interest)/Number of months * number of periods
The borrower benefits more from a decreasing balance because the overall interest payment is reduced. The interest is always levied on the leftover balance of the loan after you pay a set amount of principal under this approach. As a result, your monthly loan interest decreases. The following is the formula for determining decreasing balance:
EMI = P * [( r * (1 + r)^n)) / ((1 + r)^n – 1)]
P is the principal amount borrowed, r denotes the monthly interest rate, and n denotes the total number of monthly payments.
Both techniques, in essence, take into account the loan principal, interest rate, and terms of the loan. Calculating an EMI is similar to using a loan calculator.
What elements have an impact on EMI?
Your equivalent monthly investment is determined by a variety of factors. They are as follows:
1. The amount of the loan
The loan amount, often known as the principal, is the most important aspect in determining your EMI. It refers to the entire amount of money that you owe. Your EMI will increase as your loan amount increases.
2. The rate of interest
Your EMI is also affected by the interest rate on your loan. Your EMI is proportionate to the interest rate on your loan. In general, your interest rate is determined by criteria such as your income, credit history, and repayment capacity.
3. The term of the loan
The tenor of your loan is the number of years you have to repay it. The longer the loan tenor, the cheaper the EMI, and the shorter the tenor, the higher the EMI. A longer loan term, on the other hand, signifies a higher interest rate.
These three elements will help you figure out how much your Equated monthly installment will be.
The significance of Equated monthly installments should not be overlooked. It provides you with a preset amount that will assist you in repaying your loan at the end of the term. This streamlines the loan repayment process. Additionally, because your loan repayment amount is fixed, you will be able to create an appropriate financial budget.