What is EMI? How is it calculated?

Loans have become an integral part of our daily lives. Loans are used to help us reach important goals in our lives. When we think about loans, “EMI” is often used because the loan amount must be returned to the lender with interest.

Let’s find out what EMI is and how it works.

What is an EMI (Equivalent Monthly Installment)?

The monthly payment amount a borrower makes to a lender on a specific date in each calendar month is called EMI.

What Factors Influence EMI?

These are the factors that affect an EMI

• Principal borrowed: This is the total amount of the loan taken by the individual.
• The interest rate on the borrowed amount is.
• Terms of the loan: This loan repayment period is agreed upon between the borrower, the lender and the borrower.
• Fixed or floating type loan: The EMI will be affected if the interest rate fluctuates.

Notice: EMI amounts for fixed loans are the same throughout the loan term. The floating type has the EMI amount subject to change as the interest rate changes.

What is the amortization schedule?

The amortization schedule, a detailed table, outlines your loan details and breaks down the EMI payments. This shows how much of each EMI amount you have to pay principal and interest until the loan is paid off.

The amortization schedule allows you to see how your loan progresses throughout the loan term and includes details such:

• EMI amount
• Principal borrowed
• Each EMI payment has an interest cost

What is an Equivalent Monthly Installment (EMI)?

There are two methods to calculate the EMI. These are:

Flat Rate Method

This adds the principal amount and interest. The loan term is multiplied by the sum and then multiplied by the number of monthly payments.

Method for reducing balance

This formula calculates EMI using the reducing-balance method:

(Px I) x/(1+ r.n)/(t x ((1) + r.n)-1)

P is the principal amount borrowed. I am the annual interest rate. R is the monthly periodic interest rate. N is the total monthly payments, and t is how many months there are in a calendar year.

Notice: The EMI amount for reducing balance is less than the flat rate method. The principal loan amount for the EMI flat-rate calculation is the same throughout the loan term. The EMI calculated using the monthly principal reduction method calculates the reducing balance. Reducing balance could be more affordable for borrowers.

What are the Different Types Of Loan Interest Rates?

There are two types of interest rates.

Fixed interest rate

1. This type of loan has an interest rate that remains the same for the entire term. The EMI is the same. Fixed interest rates tend to be 1% to 22% higher than floating rates. Fixed interest rates are stable, and you can plan for your future EMIs up to the time your loan is fully paid off.

Variable or floating interest rate

1. This type of interest rate can change according to market trends. The floating interest rate is determined by the base rate offered to lend institutions and changes when that rate changes.

Fixed or floating interest rates? Which is better?

A fixed interest rate ensures that your EMI remains the same throughout the loan term. Fixed interest rates are the best option for those who don’t want the chance of rising interest rates but want certainty about their monthly payments.

A floating interest rate is recommended if the loan is long-term. Choosing floating rates when the base rate will not change or get lower over time makes sense. This allows you to plan your prepayments and lower the interest rate. This can lead to significant savings.

Is the EMI subject to change during the loan tenure?

The factors that influence your EMI include the loan amount, tenure, and interest rate.

The EMI that you pay over the term of your loan may change depending on the circumstances.

• Loan Prepayment – Some banks let you prepay a portion of your loan amount in a lump sum. This is a lot more convenient than your regular monthly payment. Prepaying a portion of your loan amount will reduce your principal amount and lower your interest rate.
• Floating Interest Rate: Fixed interest rate loans have an unchanged EMI. If you choose a floating interest rate, the interest rate will change according to market conditions. This will affect the EMI amount.
• ProgressiveEMIs: Many banks and lending institutions offer progressive EMIs. You will have to pay a fixed EMI over a set period. Later, the amount is increased. This facility is often used for long-term loans.

What is an EMI calculator?

An EMI calculator online tool calculates your EMI and compares EMIs of different loans and tenures. The three main factors that affect the calculation are loan tenure, interest rate, and loan amount.

The EMI Calculator has many benefits and features.

• It calculates your monthly EMI amount in just seconds.
• You can then plan your budget based on the EMI amount.
• It is possible to see the amount you have to pay and how much interest it will cost.
• This tool will help you determine the best loan term for you.