What is EMI and how is it calculated?

what is emi

If you’re keeping confused about what should be charged as an EMI, then firstly you must know about EMIs properly.
Also, do you understand what’s a fair amount paid as EMI? Through this article, we can calculate an installment so that it’s easier to cross verify what you’ve been getting every month.

Today, personal loans play an important role in everyday life, and meet a few set goals in life. Whether we talk about buying a house, educating the kids, investing into profitable avenues, etc., loans play an instrumental role in life.

However, whenever we discuss loans, the word EMI come handy with it. An EMI is basically known as equated monthly installment, meaning monthly installments to make good the loan taken. An “EMI is the total payment including contributions of both the principal and interest component. The interest paid is much higher in the initial stage, owing to the higher principle amount at stake. As we march forward with the loan term, interest payments become lower and the principle contribution increases.

How does the Loan Amortization Schedule flow?

The loan amortization schedule is a tabular presentation of the loan amount along with the EMIs. It reflects on the bifurcation between the interest component and the principle component of a particular loan amortization. This schedule essentially aids the prospective borrower to keep a close eye on the amount to be paid and what is due in the future. It carries all relevant information like the time span of payment, monthly installments, interest rates, principal amount and the remaining loan.

How do we calculate the EMIs?

Taking into the account the above underlined factors, the main 3 guiding factors are the EMI payments, which is directly proportional to the loan amount and the rate of interest which is inversely proportional to the loan tenure.

Higher the principle amount or the rate of interest, greater is the EMI payments and conversely. In case of the loan repayment, the interest component increases with the principle, however the EMI payment decreases. This is the result of ups and downs in the tenure.

There’s another factor which changes how EMI payments respond. The other important factor which impacts the EMI payments is pre closure or partial payments successfully made towards the loan taken. Any partial payment towards the loan are subtracted from the principle loan at the end of the tenure. This eventually reduces the total interest payable. Typically, individuals making partial payments are allowed to keep the time period constant or the EMI instead. If an individual chooses to keep the tenure constant, then the EMI payments will differ. (maybe reduced)

Today, loans & credit have become an inherent part of an individual’s life. This is important to realize and make good the key goals. Whether we talk about buying a house, or paying up for top quality education for children, anything and everything stays unchanged. Ruling out the extra payments for the loan borrowed.

However, when we discuss about loans, EMI is the most important word linked to loans and this is why a loan must be well thought out!

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