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.
There are many repayment structures for repaying loans such as:
Equated Monthly Instalments are the most common among these and make it easier for you repay your dues. Here’s how:
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:
Also Read : Tips to Lower EMI For a Personal Loan
Here are the 2 methods that lenders use to calculate EMIs:
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,
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,
Note the following factors that impact your monthly instalment 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.
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.
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.
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.
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.
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.
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.
Generally, the financial institution automatically deducts the EMI amount from your bank account on the payment date.
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.
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.
No. In fact, it is a reliable option to pay the borrowed loan and interest.
It is the specific date on which you are required to pay the instalments of your loan every month.
