What is EMI and How it Works?

by Nisha Scott Account manager

Your mind might be full of several things like the type of loan, lender, and whatnot if you are planning to apply for a loan. While digitisation has abundantly helped the loan industry in India and has made loans more accessible, there are still many different things a new borrower is confused about before applying for a loan. One of the most important of them is EMI.

What is EMI? How is it calculated? These and a few other common questions related to EMI are discussed below-

1. What is EMI?

One of the most significant benefits of taking a loan is that it allows you to borrow a large amount and repay the same in smaller monthly instalments. These monthly instalments are known as EMIs or Equated Monthly Instalments.

It is generally a fixed amount that you pay to your lender on a fixed date every month until the loan is completely repaid.

2. What Does the EMI Consist Of?

The EMI amount is made up of two parts- Principal and Interest. In the initial years of repayment, the interest part is higher than the principal part in the EMI amount. In the later years of the loan, the principal part increases and gets higher than the interest part.

So, this means that if you have taken a loan for ten years and have repaid it for five years already, it cannot be considered as you have repaid half of the loan. It would mean that you have considerably reduced the interest part of the loan as compared to the principal portion of the loan.

3. How is EMI Calculated?

While you can now use an online EMI calculator to know your exact EMI payment, you can also calculate it manually. The formula to calculate EMI is as follows-

EMI = [P x I x (1+I) ^ N] / [(1+I) ^ N-1]

Here, P is the total loan amount, I is the interest per month, and N is the total number of instalments.

4. Is EMI Only Related to Loans?

Apart from loans, banks in India now also offer facilities like making purchases on EMIs through credit cards and debit cards. With EMI on debit card and credit card, you get to purchase a product online or offline and pay for the same through monthly EMIs of 3 months, 6 months, or more.

This allows you to make big-ticket purchases even when you do not have the entire amount to pay for the purchase at once.

5. What If You Are Not Able to Pay an EMI?

If for some reason you are not able to pay the EMI of your loan, you will be required to pay a late payment fee. In case if the EMI is not paid for 2-3 months, the bank can also close your loan account and initiate legal proceedings to recover their dues.

So, before taking any loan or purchasing a product on EMI, make sure that you can afford the EMI while also being able to manage your other expenses.

Understanding EMI before Taking a Loan

The concept of EMI should be clearly understood before taking a loan or using facilities like EMI on credit card or debit card. Use an online calculator to know the exact EMI of your loan and only go ahead with the loan if you can easily manage the monthly instalments. This will protect you from late payment penalties and legal proceedings due to non-payment or late payment of EMIs.

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Created on May 29th 2020 01:41. Viewed 534 times.

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