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Equated Monthly Instalments (EMI) Demystified

1. Introduction

The one thing that strikes the minds of Gen-X and Millennials whenever they need to make a huge purchase is those three-word saviors — EMI. Yes, in the backdrop of rising prices and rising inflation, EMI is a savior to many of those who are entirely dependent on salaries.

We can hardly find a thing that cannot be purchased on EMIs nowadays. Even online shoppers are enjoying the benefits of EMI and bringing home their dream purchases as and when they are needed. Not just homes — laptops, television sets, cars, bikes, home appliances — almost any item that is beyond affordable price are falling into EMI category. Retailers, too, are luring customers with tags such ‘zero cost EMI’,’ EMI option available’,’Buy now, Pay later’, etc.

This post lets you understand in detail what EMI means, its components and how it works and such concepts involved.

2. EMI Calculator - Defined

Merely stating, an EMI is a fixed amount that a customer agrees to pay to the lender or the seller at a fixed date every month, for the purchase made, till the loan is fully repaid.

You can pay EMIs through the following methods:

  • Via cheque every month on a fixed date
  • Set up auto debit from your bank account with debit instructions

3. What makes an EMI?

When you pay an EMI, you are paying two components together:

  • The loan principal amount
  • The associated interest

Suppose that your loan is for a tenure of ten years and you pay for EMI for the ten whole years. Then during the first years, for around 6-7 years you keeping paying more of interest and less of principal. In the later years, the actual principal amount keeps decreasing.

EMI covers more of interest amount in the earlier years and principal amount in the later years.

4. How is EMI calculated?

EMI is calculated in two ways basically:

  • Flat Rate:

    This is the more straightforward calculation. Here, the principal and the interest are added together. The total tenure divides the entire amount in months. The resultant amount will be the EMI that the borrower has to pay.
  • Reduce Balance Method:

    Here EMI is calculated using the following formula:

    ( P × r ) × ( ( 1 + r )n )
    ( t × ( ( 1 + r )n ) - 1 )
    where P is equal to the principal amount borrowed
    r is the periodic monthly interest rate
    n is the total number of monthly payments
    t is the number of months in a year.

5. I have found a change in my EMI being debited

Yes, it can happen. You would have opted for a floating rate of interest. There are two types of EMI interest rate:

  1. Fixed rate of interest, where the rate of interest in fixed throughout the tenure of the loan.
  2. Floating rate of interest, where the rate of interest keeps changing as per the changes made by the lender.
Remember that you can always make an option and request your bank to either change or not to change the rate of interest.

6. Is there any other way where EMI will change?

Yes. There is. When you prepay the loan in a lump sum before the tenure of the loan, your principal goes down, hence the EMI comes down. I think the saving amount in the bank is better than prepaying my EMI based loan. It is always suggested to prepay the EMI based loan when you have lump sum amount in hand (assuming you have no other immediate needs) because this will bring down the cost of EMI that you pay every month.

7. Is progressive EMI beneficial?

Yes. It is. A progressive EMI is the type of EMI wherein, EMI amount increases after a designated number of months. This way you pay larger EMIs later on and your loan clear up faster. This is commonly becoming a preferred option for most millennials who start their earning lower initially and then earn more later on. Do not save what is left after spending, but spend what is left after saving. – Warren Buffet

8. What are the tips to cut down EMIs?

  • Prefer loans from banks you have been associated since long.
  • Prefer paying in a lump sum and when you have money in your pocket.
  • Consider for longer tenures (as we said you might end up paying more, but you will have relief every month.)
  • If you have multiple loans, try clearing the one which has the highest rate of interest first.
  • Try changing your loan to another bank with a lesser rate of interest, if possible.
  • Try for a higher initial down payment while making the purchase.
  • Talk to the bank and try negotiating interest rate. You can turn lucky sometimes!

9. Main factors that an EMI of a loan is dependent on

Majorly, three factors decide the amount of EMI you pay.

  1. Loan Amount:

    Higher loan amount, higher EMI.
  2. The rate of Interest:

    Higher rate of interest, higher EMI.
  3. Tenure:

    Longer the tenure, lower the EMI. (The key here is with longer EMI you finally end up paying more interest and thus more amount that you have borrowed.)

10. How CalculatorHut’s Loan/EMI calculator helps you?

In this era of EMIs, where you need EMI for everything, you can easily calculate EMI using our EMI calculator. Whether it an education loan, personal loan or vehicle loan, or housing loan, our calculator will help you in planning for the purchase and knowing the EMI that you would need to pay.

For this, all you need to do is enter the loan amount you have taken, interest percentage and tenure of your loan. Click calculate, and you can see the total amount payable with interest and the total interest you need to pay for your loan. Now you can happily start planning your budget accordingly!

Make our EMI calculator a friend for your budget planning!

A budget is telling where your money should go, instead of wondering where it went. – Dave Ramsey

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