EMI full form stands for Equated Monthly Installment that refers to monthly fixed payment amount which a borrower needs to pay to a moneylender. It has to be paid on the specific date of each month for a specific period of time.
EMI includes the principal amount and interest component that a borrower is supposed to pay to lender over a specific number of years to pay off the loan completely. It is basically an unequal combination of principal money and interest rate. So, if you are planning to take loan from a bank for any purpose, it is important to understand how banks work out the EMI.
So, that you could evaluate various loan options of different banks and chose one of the best as per your financial constraints.
How To Calculate EMI?
Calculations of EMI depend majorly on three factors mentioned below:
- 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.
What is Flat Interest Rate?
Flat interest rate is calculated on the whole principal loan without considering the fact that with each EMI the principal amount is getting reduced.
To understand let’s take an example:
Rakesh takes a car loan of Rs. 3 lakh, at a flat interest rate 12% and has to pay off it in 3 years then the EMI can be calculated as:
Principal amount: 300,000
Flat rate of interest: 12%
Total duration: 3 years
EMI: Principal amount/36 + Flat rate of interest/12
EMI for Rakesh will be= 300,000/ 36 months + 12% /12 months
Usually, the flat rate of interest is applied on short term loans such as car loan and two-wheeler loan.
Diminishing Balance Interest Rate:
Diminishing balance Interest rate refers to the interest amount that varies each month as for the first month interest is calculated on the whole principal loan and for the subsequent months interest is calculated on the outstanding loan amount.
Given below is the formula or method to calculate the reducing interest amount:
Principal Loan Amount= 300,000
Diminishing rate of Interest=12%
Duration: 3 year
Interest for first month = loan amount (300, 000)*(1/12*)*(12/100) =3000
Interest for second month= (outstanding loan amount)*(1/12)*(12/100)
Advantages Of EMI
- EMI gives the power to buy as it lets you buy items beyond your monetary reach by allowing you pay for that particular item in instalments.
- There is a lot of flexibility as you can consider different EMI options offered by different banks, the amount that you want to pay as installments and even, you can choose the tenure of loan as per your financial position.
- There is no middleman involved as the borrower directly pays the EMI to the lender without any trouble.
- It also safeguards the savings as it is required to pay minimum regular payments instead of a lump sum amount.
Q. What is the full form of EMI?
A. EMI stands for Equated Monthly Instalments
Q. On what basis EMI is calculated?
A. EMI is calculated on loan amount, tenure and interest rate.
Q. What happens if you skip any EMI?
A. If you skip EMIs and assuming EMIs remains the same, it is just that the tenure of the loan would increase.
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