EMI or equated monthly installment♦️

EMI or equated monthly installment, as the name suggests, is one part of the equally divided monthly outgoes to clear off an outstanding loan within a stipulated time frame.

Description: The EMI is dependent on multiple factors, such as:

1) Principal borrowed

2) Rate of interest

3) Tenure of the loan

4) Monthly/annual resting period

For a fixed interest rate loan, the EMI remains fixed for the entire tenure of the loan, provided there is no default or part-payment in between. The EMI is used to pay off both the principal and interest components of an outstanding loan. The first EMI has the highest interest component and the lowest principal component. With every subsequent EMI, the interest component keeps on reducing while the principal component keeps rising. Thus, the last EMI has the highest principal component and the lower interest component.

In case the borrower makes a pre-payment through the tenure of a running loan, either the subsequent EMIs get reduced or the original tenure of the loan gets reduced or a mix of both. The reverse happens when the borrower skips an EMI through the tenure of the loan (EMI holiday or cheque dishonor/bounce or insufficient balance in case of auto deduction of EMI or a default); in that case either the subsequent EMIs rise or the tenure of the loan increases or a mix of both, apart from inviting a financial penalty, if any.

Similarly, in case the rate of interest reduces through the tenure of the loan (as in the case of floating rate loans) the subsequent EMIs get reduced or the tenure of the loan falls or a mix of both. The reverse happens when the rate of interest rises.

Suppose a person borrows Rs 1 lakh for one year at the fixed rate of 9.5 per cent per annum with a monthly rest. In this case, the EMI for the borrower for 12 months (1 year X 12 months = 12 months) works out to approximately Rs 8,768.