EMI : Equated Monthly Installment

Introduction

Equated Monthly Installments (EMI) is a popular and convenient method of repaying a loan.

It is a fixed amount of money that a borrower pays to a lender at a set date each calendar month. The EMI is designed to repay the loan, including the interest and principal, over a specific period of time. The concept of EMI is widely used for various types of loans such as home loans, car loans, personal loans, and education loans. In this article, we will discuss the concept of EMI in detail, how it is calculated, and how it can be used to repay a loan efficiently.

What is EMI?

EMI stands for "Equated Monthly Installment." It is a fixed amount of money that a borrower pays to a lender at a set date each calendar month. The EMI is designed to repay the loan, including the interest and principal, over a specific period of time.

EMIs are used for a wide variety of loans like home loans, car loans, personal loans, and education loans. The EMI amount is determined by the loan amount, the interest rate, and the loan repayment period.

How an EMI works?

The EMI is designed to repay the loan, including the interest and principal, over a specific period of time. Here's how an EMI works −

• A borrower applies for a loan and the lender approves the loan based on the borrower's creditworthiness and income.

• The loan amount, interest rate, and loan repayment period are determined by the lender.

• The EMI is calculated based on the loan amount, interest rate, and loan repayment period. This calculation is done using a mathematical formula that takes into account the loan amount, interest rate, and loan tenure.

• The borrower pays the EMI on the due date each month. The lender applies the payment towards the interest and principal, reducing the overall balance of the loan.

Examples of EMI

An example of EMI can help to understand how it works −

For example, let's say a borrower takes out a loan of $20,000 at an interest rate of 8% per annum, and the loan repayment period is 5 years. The EMI would be calculated as follows −

$\mathrm{EMI\:=\frac{[P\:\times\:R\:\times\lgroup\:1\:+R\rgroup\:^N ]}{[\lgroup\:1\:+\:R\:\rgroup\:^N\:-\:1]}}$

Where P = loan amount ($20,000), R = interest rate (8% or 0.08), and N = number of monthly payments (60 months)

$\mathrm{EMI\:=\frac{[20000 \:\times\:0.08\:\times\lgroup\:1\:+0.08\rgroup\:^6\;^0 ]}{[\lgroup\:1\:+\:0.08\:\rgroup\:^6\:^0\:-\:1]}}$

$\mathrm{EMI\:=$421.1}$

How is EMI deducted from a credit card?

EMI (Equated Monthly Installment) can be deducted from a credit card in the following way −

• A borrower must have a credit card with a credit limit high enough to cover the loan amount.

• The credit card issuer reviews the request and approves it based on the credit limit on the card.

• The credit card issuer divides the loan amount into equal monthly installments and sets a repayment schedule for the borrower.

• The EMI amount is automatically deducted from the borrower's credit card account on the due date each month.

• As the loan is repaid, the borrower builds a positive credit history and may be able to qualify for other loans in the future.

Is EMI good or bad?

EMI (Equated Monthly Installment) can be both good and bad, depending on the borrower's financial situation and how the loan is used.

Advantages of EMI

• EMI allows borrowers to make manageable monthly payments, making it easier to repay a loan.

• EMI can help borrowers to purchase expensive items, such as a home or a car, that they may not be able to afford upfront.

• EMI can help to improve credit score, as long as the borrower makes timely payments.

• EMI is a widely available option, as it can be used for various types of loans such as home loans, car loans, personal loans, and education loans.

Disadvantages of EMI

• EMI can be expensive in the long run, as the interest rate on the loan may be higher than other types of loans.

• EMI may require a borrower to pay a higher amount of interest over time, which can make the loan more expensive.

• EMI can be a financial burden if the borrower is unable to make timely payments, which can lead to late fees and penalties and negatively affect the credit score.

• EMI may prevent borrowers from saving money in the short term, as a significant portion of their income is going towards repaying the loan.

Overall, EMI can be a good option for those who can afford it and use it wisely, but it's important to consider the costs.

Conclusion

In conclusion, EMI (Equated Monthly Installment) is a popular and convenient method of repaying a loan. It allows borrowers to make manageable monthly payments, making it easier to repay a loan. EMI can help borrowers to purchase expensive items, such as a home or a car, that they may not be able to afford upfront. However, it is important to note that EMI can be expensive in the long run and can be a financial burden if the borrower is unable to make timely payments.

FAQs

1. If you have a loan for a long period of time, then is EMI benificial?

No, EMI is not beneficial for a long period of time. This is because it increases the amount of interest that is to be paid.

2. How is EMI calculated?

EMI is calculated based on the loan amount, the interest rate, and the loan repayment period. It is calculated using a mathematical formula that takes into account the loan amount, interest rate, and loan tenure.

3. What are the components of EMI?

The EMI consists of two components: the interest and the principal. The interest component is the cost of borrowing the money, while the principal is the amount of the loan itself.