What Is EMI? EMI Full Form, Types, Calculation, and More

Understanding the meaning of EMI is crucial if you are planning to get loans and credit cards. Since you are repaying in parts and not in a lump sum, EMIs offer a more convenient way to lower your financial obligations with periodic payments.

Read on to learn the meaning of EMI, how it works and more.

EMI: Full Form and Meaning

There are many repayment structures for repaying loans such as:

• Balloon repayment 
• Interest-only repayment
• EMIs

Equated Monthly Instalments are the most common among these and make it easier for you repay your dues. Here’s how:

• It is calculated using the borrowed principal amount, interest levied and your chosen tenure
• It involves a predetermined amount so you can plan repayment beforehand 
• It requires you to pay your lender a monthly instalment
• You pay these instalments for a specified period until the dues are clear

How does EMI Work?

Taking into account the loan amount, the financial company adds interest to it based on your repayment duration. This amount is spread across the tenure, which results in your EMIs. Thus, all these three terms influence your EMIs. 

Here’s what your repayment will look like if you take a loan of ₹1,00,000. 

Particulars	Details
Loan Amount	₹1,00,000
Interest rate	14%
Tenure	12 months
Total interest applied	₹7,748
Total repayment amount	₹1,07,748
EMI for 12 months	₹8979

Keep the following in mind:

• The EMI amount stays the same throughout the tenure of the loan
• As you pay an instalment, your total payable reduces by that figure
• After the last payment, the lender will close your loan
• Collect a No Objection Certificate (NOC) from them
• Check your credit report to ensure the loan account is closed and your credit score increases

Also Read : Tips to Lower EMI For a Personal Loan

How is EMI Calculated?

Here are the 2 methods that lenders use to calculate EMIs:

Fixed-Rate Method

Under this method, the calculated interest amount depends on the principal amount. To calculate the instant cash loan EMI, lenders calculate the total sum of principal and interest. This amount is then divided into equal instalments. Since the interest rate remains fixed, the principal and interest component of the EMI stay the same throughout the tenure.

Here is the formula for the fixed-rate method:

date

((P x R x N) + P )) / (N x 12)

Where,

• P is the principal amount
• R is the rate of interest
• N is the tenure of the loan

Reducing Balance Method

Under this method, the interest amount varies with the balance after each EMI payment, i.e., the outstanding amount. Because of this, the interest and principal components vary for every instalment. 

However, the EMI will remain fixed throughout the tenure. As you continue to make payments, the principal increases and the interest decreases with every EMI. Here is the formula for this method:

P x R x (1+R)^N/[(1+R) ^ (N-1)]

Where,

• P is the principal amount
• R is the per-month rate of interest
• N is the loan tenure in months

Factors that Influence the EMI Amount

Note the following factors that impact your monthly instalment amount. 

• Principal Amount

The EMI contains a portion of the principal amount, and therefore, they are directly related. As such, the EMI will be higher if the credit amount is high and vice versa.

• Interest Rate

The interest is a significant contributor to your total financial liability. As such, this amount directly affects the EMI amount. If the rate is higher, so will be the instalment amount and vice versa.

• Loan Tenure

This is the total period within which you need to repay the borrowed funds. Since it affects how many instalments you will pay, it’s inversely related to the EMI amount. A longer tenure will result in lower instalments and vice versa.

• Credit Score

It reflects your creditworthiness, as a higher score implies a lower risk of default. This way, you can negotiate for comfortable terms. However, if you have a poor score, the lender will likely levy a higher rate, increasing the EMI amount.

Check your Credit Score

Armed with this information, you can choose a better repayment plan. Remember, your interest rates have a significant influence on your EMI amount. Thus, it’s important to choose a lender that offers pocket-friendly rates like Fibe. With our Instant Cash Loan, you can get up to ₹5 lakhs at an affordable rate.

You only have to meet a few basic criteria, submit minimal documentation and apply online to get the funds in just a few minutes. Download the Personal Loan App or register on our website to apply.

FAQs on EMI

What is the formula used in calculating EMI on loans?

The EMI calculation formula under fixed rate is ((P x R x N) + P)) / (N x 12). Under reducing balance, the formula is P x R x (1+R) ^N/[(1+R) ^ (N-1)]. In both cases, P is the principal, R is the interest rate and N is the tenure.

Why is EMI used?

It’s used to make credit repayment convenient for the borrower. It divides the total payable amount into affordable portions to help the borrower meet the repayment needs and reduce the default risk.

How is EMI deducted?

Generally, the financial institution automatically deducts the EMI amount from your bank account on the payment date.

Is EMI a good or bad option?

EMI is a good credit repayment option since it allows you to reduce your repayment burden by allowing you to pay in budget-friendly instalments instead of a lump sum amount.

What is the difference between an EMI and a loan?

A loan is a financial product that allows you to borrow funds. EMI is a repayment method for loans where you pay a fixed amount for a fixed duration. 

Is EMI risky?

No. In fact, it is a reliable option to pay the borrowed loan and interest.

What is the meaning of the EMI levy date?

It is the specific date on which you are required to pay the instalments of your loan every month.