What is an EMI (equated monthly installments)?

Nowadays, people are very much interested in ‘BUY’ now and ‘Pay Later’ concept. many shops are tying up with banks/financial institutions and offering Pay Later options EMI options on purchase. Now we discuss what is an EMI (equated monthly installments).

Let’s have a deep dive into the EMI concept.

Nowadays, EMI’s are very popular as one can avail it easily and pay a fixed payment amount to the lender every month on an agreed basis.

Dozens of lenders are attracting us with multiple schemes and features on EMI.

EMI is nothing but equated monthly installments, it is a common term associated with any loan – home, personal or business.

When you avail of a loan, you have to repay it to your lender on a fixed date through EMI’s (equated monthly installments).

Every EMI will have two components – principal and interest.

You can pay EMI’s through a cheque or online payment.

Below are the two methods that very popular to calculate the EMI’s.

Flat Rate Interest:

Interest will be levied on the total loan amount regardless of the principal amount that you paid back to your lender.

Let’s calculate the EMI using Flat Rate Interest Method Method as below,

For example,

Principal= 2L

Rate of interest=12%

Tenture=24 Months

Let’s calculate the EMI now,

EMI = (P + R)/Tenture

EMI = (200000 + 48000)/24 = Rupees 10,333.33

Reducing Balance Interest:

Here, the interest rate is always levied on the remaining principal on a reducing balance basis. The interest component in the EMI keeps reducing every month.

Let’s calculate the EMI using Reducing Balance Interest Method as below,

EMI = [P x R x (1+R)^T]/[{(1+R)^T}-1]

consider the following values to calculate,

Principle=2L

Rate of interest=12%

T(tenture)=24 Month

Let’s caluclate now,

EMI = [200000 x 12/(100 * 12) x (1.01)^24] / [{{1.01)^24}-1]

= 2000 x 1.2697 / 0.2697

= 9415.65

Note:

The EMIs under reducing balance method are lower than EMI”s in the flat rate interest method.

Read: Why personal finance is much important?

You are a rock start now. Have a happy investing!!

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