You must have heard of the term EMI in banking. Do you what exactly it means? The full form of EMI is Equated Monthly Installments and it is one the most convenient ways to repay your loans. Saving you from undue financial strain, EMIs can help you finance everything from your smartwatch to your study-abroad educational pursuits. Instead of paying for them in lumpsum, one can choose to pay in equal instalments.
Knowing all about the details of this financial term and its working helps in hassle-free financial management. Let’s know all about the full form of EMI, its significance, components, working, calculation and everything else.
Table of contents
What is the Full Form of EMI?
EMI stands for Equated Monthly Installments. As the name suggests, these are the fixed equal payments made by the borrower to the lender every month at the specified date. When an individual takes a loan (personal loan, house loan, or education loan), the repayment is made in parts. EMI helps them to cover the initial amount of the loan, called the principal along with the interest due.
The major loan amount is divided into smaller amounts that must be paid back at regular intervals. Thus, EMI helps in relieving the undue financial strain.
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Features and Significance of EMI
Let’s have a look at the main features and significance of choosing EMI as the repayment option.
- They are equal amounts of instalments paid at a specified date of every month.
- EMIs provide a structured way of loan repayment.
- It provides transparency to the borrowers on how much amount is to be paid monthly.
- EMIs are a flexible repayment option that can be customised and restructured as per the borrower’s needs.
- EMIs are an affordable option for availing the benefits of the loaned-out asset and paying for it in upcoming years.
- Timely EMI payments help an individual improve their credit score.
- Income Tax rebate under section 80E of the Income Tax Act is applicable to certain kinds of loans like education loans.
How Does EMI Work?
The concept of EMI was introduced understanding that it might get challenging for an individual to repay huge amounts of funds taken to finance personal, housing, or educational dreams. To make the repayment easier, two major components- the principal amount and the interest amount were added to the monthly instalments.
- The principal amount refers to the actual loan amount received by the borrower. (For example- if an education loan of INR 60 lakhs is availed, then 60 lakhs is the principal amount)
- The interest amount is the cost incurred by the borrower to utilise the principal amount. For example- on an education loan of INR 60 lakhs, if the monthly instalment is INR 55 thousand, then it will have an inclusion of interest amount based on the interest rate calculation).
The borrowers agree to pay the principal amount + interest amount in equal monthly instalments. The repayment loan tenure ranges from months to years based on the loan amount and borrower’s need. Initial EMI payments include a maximum amount towards interest payments. Over the years, the proportion allocated to interest decreases and the portion of the principal amount increases. Finally, timely EMI payments ensure repayment of the loan availed.
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How EMIs are calculated?
EMIs are calculated using the formula [P × R × (1+R)^N] / [(1+R)^N-1]. The formula takes loan tenure, interest rate and the loan amount into consideration for EMI calculation. Here, P stands for the principal amount, R stands for the monthly rate of interest (annual interest rate divided by 12), and N stands for the number of monthly instalments.
Let’s take an example to understand the EMI calculation in the following situation- Ram took an education loan of INR 50 lakhs at 9% p.a for 15 years. Now,
P= 50 lakhs
N= 15 years
R= 9/12/100 = 0.0075
EMI= [P × R × (1+R)^N] / [(1+R)^N-1]
50,00,000 * 0.075 * (1 + 0.0075)150 / ((1 + 0.0075)150 – 1) = INR 50,713.
Thus, based on the above formula and calculation, the following is the result of EMI calculation-
| Monthly EMI | INR 50,713 |
| Principal amount | INR 50,00,000 |
| Total interest | INR 41,28,399 |
| Total amount | INR 91,28,399 |
You can simply use the Fly. Finance EMI Calculator and save yourself from the hassles of complex calculations.
Also Read: Check about the Education Loan EMI Calculator with or without the moratorium period and determine the significance and functioning of the same.
Factors Affecting EMI Payments?
As discussed, EMI calculation is based on the principal amount, interest rate and loan tenure. These are the major factors that influence EMI payments. The higher amounts of loan amount, interest rates and loan tenure result in higher Equated Monthly Instalments. Other factors that affect EMI payments are down payments and credit scores. Let’s have a look at these factors in detail-
- Principal Amount- If the borrower has taken a higher loan amount, the amount of the monthly instalment will also be higher.
- Interest Rate- Loans availed at high interest rates automatically lead to higher EMIs. Make sure to compare the lenders and choose one that offers loans at competitive rates of interest.
- Loan Tenure- Longer duration of repayment can result in smaller EMIs. However, this affects the overall interest costs (making them go higher).
- Down Payment- Down Payment refers to the amount of initial payment when purchasing anything on credit. Larger down payments result in lower EMIs.
- Credit Score- A good credit score often leads to loans at lower interest rates. This affects the overall EMI calculation.
FAQs on EMI
EMI stands for Equated Monthly Installments which is one of the most convenient ways to start making repayments of education loans, home loans, personal loans or others.
EMI payments save borrowers from undue financial strains by making equal monthly instalments over a specified period. These payments are to be made on a fixed date of every month, and the timely payments help in improving the credit score. Also, the interest amount paid on the EMIs of education loans is subject to an income tax rebate under Section 80E of the Income Tax Act.
On missing the EMI payments, the borrowers have to pay penalties to the lender, irrespective of the reasons. The penalty is based on the loan terms and conditions. Make sure to not miss any EMIs as it can severely affect the credit score and history.
The major factors that influence EMI payments are the principal amount, interest rate and loan tenure. The higher amounts of loan amount, interest rates and loan tenure result in higher Equated Monthly Instalments. Other factors that affect EMI payments are down payments and credit scores.
EMIs are calculated using the formula [P × R × (1+R)^N] / [(1+R)^N-1]. The formula takes loan tenure, interest rate and the loan amount into consideration for EMI calculation. If you have taken an education loan of INR 50 lakhs at 9% p.a for 15 years, the EMI will be INR 50,713 according to the formula.
EMI payments are simple and convenient ways of repaying a loan or repaying for a thing bought on a credit. Borrowers have to simply pay the fixed equal amounts every month at a specified date till the amount is completely paid off.
This was all about the full form of EMI and its benefits, working, and calculation. Make sure to read all the terms and conditions before choosing this convenient way of loan repayment.
To know more about education loans, the best bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience.
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