EMI full form is Equated Monthly Installment. This is the fixed repayment amount that a borrower pays the lender on a certain date each month for a certain period. An EMI consists of a principal component and an interest component where the borrower is assumed to present a loan in a certain amount to repay the loan. Therefore, it is an unequal mix of capital and interest. If you are planning to get a loan from a bank, you need to understand how the bank operates at EMI in order to evaluate the different loan options from different banks and choose one according to your financial constraints.
Equated Monthly Installments (EMIs) are defined by as “a fixed amount paid by the borrower to the lender on the specified date of each calendar month. Equated Monthly Installments are used to pay interest and principal amount each month during a specified period. Is done. The year’s loan is repaid with interest. “
The same monthly installments differ from variable payment plans, as the borrower may pay a higher amount at his discretion. Under the EMI scheme, borrowers are usually allowed to pay a fixed amount each month. The advantage of EMI for borrowers is that they know how much money they will need each month to repay their loan, making the personal budgeting process easier.
It further states that with the most common types of loans, such as mortgages, the borrower makes regular, fixed payments to the borrower over many years to pay off the loan. EMI is different from variable payment packages, in which borrowers can make a large amount of payment at their discretion. Under the EMI scheme, borrowers are usually allowed to pay a fixed amount each month.
Advantages
- The advantage of EMI for borrowers is that they know exactly how much money they have to pay for their loan each month, which makes it easier to prepare a personal budget.
- Purchasing Power: This allows you to buy items outside the limits of your money by allowing you to pay in installments.
- Flexibility: You can think about the multiple monthly installment options offered by different banks and specify the amount you want to pay in installments, as well as choose the loan term according to your financial situation.
- No broker: You pay the EMI directly to the lender without having to contact the broker.
- Protect savings: This does not hurt your savings because you are required to make a regular minimum payment, not all at once.
For fixed interest the Equated Monthly Installment is fixed for the life of the loan, provided there is no outstanding or partial payment. Equated Monthly Installments are used to repay the principal and interest components of the existing loan. The first EMI has one component of major importance and at least one major component. With each subsequent period, the interest component continues to decrease while the principal component continues to increase. Thus, the final EMI has the highest principal component and the least useful component.
In the event that the borrower makes an advance payment by keeping the loan current, the following monthly deductions will be made in equal installments, a fall in the initial loan, or a combination of both. The reverse occurs when the borrower exceeds the maximum permissible loan while taking a loan (check EMI break / return or insufficient balance in case of automatic downgrade or default of monthly equal installments); In this case either a subsequent increase in monthly installments or an increase in credit ownership or a combination of both, as long as the penalty, if any, is required.
Similarly, if the interest rate falls while taking a loan (as in the case of floating rate loans), the next EMI decreases or the credit holder falls or a combination of the two. The opposite occurs when the interest rate increases.
How to calculate EMI
Interest Rate: Rate of interest charged by the moneylender, e.g. Bank.
Loan Amount (principal loan): The amount borrowed.
Tenure of the Loan: The time provided by the lender to repay the entire loan including the interest.
Interest is calculated on all major loans, despite the fact that the principal amount decreases with each monthly installment. For example, if someone wants to buy a car and get a loan with three cars, the interest rate is fixed at 12% and must be repaid within 3 years, and the EMI can be calculated as follows:
Principal amount: 300000
Fixed interest rate: 12%
Total term: 3 years
Equated Monthly Installment: Loan Principal Amount (300,000) divided by 36 months + 12% Loan Principal Amount divided by 12 months = 8333 + 3000 = 11,333
Fixed interest rates usually apply to short-term loans such as auto loans and two-wheel loans.
Reducing the interest rate on the balance:
If any of the remaining interest rates fall, the interest amount changes every month because the interest is calculated for the first month of the principal loan in full and the interest for the following months is calculated from the amount owed on the loan. The following is the formula or method for calculating a reduced interest amount:
Principal Loan Amount = 300,000
Low interest rate = 12%
Duration: 3 years interest for the first month = Loan amount (300,000) * (1/12 *) * (12/100) = 3,000 interest for the second month = (Outstanding Loan Amount) * (1/12) * (12/100)
For example, if you borrow 10,000,000 currency units from a bank for 10 years (ie 120 months) at an annual interest rate of 10.5%, EMI = 10,000,000 currency units 0.00875 (1 + 0.00875) 120 / ((1 + 0) , 80875)) (120-1) = 134,935 currency units This means that you will have to pay more than 120 134,935 currency units to repay the loan amount. The total amount to be paid is 134,935 x 120 = 16,192,200 CU which includes 6,9002,200 currency units as interest on loan.
Assume someone borrowed one Lakh rupee for a year at a steady rate of 9.5 percent per Annum with a monthly break. In this case, the value of the monthly loan installments to the borrower for 12 months (1 year x 12 months = 12 months) is around Rs 8768.
