Acronyms are important in financial management since they help to clarify complex concepts. One such acronym is EMI (Equated Monthly Instalment), which is frequently used in the realm of loans and financial commitments. Understanding EMI helps borrowers manage repayment schedules effectively, ensuring they stay on track with their financial obligations.
What is the full form of EMI?
EMI stands for Equated Monthly Instalment. Essentially, an EMI is a fixed payment made by a borrower to a lender on a specific date each month. This instalment consists of both the principal loan amount and the interest accrued over the loan tenure.
How does an EMI work?
When you take a loan, the total amount is divided into equated monthly instalments, ensuring that you pay a consistent amount every month. Initially, a larger portion of the EMI goes towards interest payments, while the remainder covers the principal amount. As time progresses, the interest component decreases, and the principal repayment increases, resulting in a gradual reduction of the outstanding loan.
How is EMI calculated?
The formula for calculating EMIs involves three primary factors: the loan amount, the personal loan interest rate, and the loan tenure.
The formula commonly used for EMI calculation is:
EMI=P×(1+r)n−1r×(1+r)n
Where:
- P is the principal loan amount.
- r is the monthly interest rate
- n is the total number of monthly payments (loan tenure in months).
How is EMI calculated for the flat rate method?
EMI can be calculated using the flat rate method, where interest is charged on the entire principal amount for the loan tenure, regardless of the amount already repaid. Here’s how it works:
- Principal amount: Determine the total loan amount.
- Interest rate: Identify the annual interest rate applicable.
- Loan tenure: Establish the duration of the loan in months.
- Total interest: Calculate total interest by multiplying the principal by the interest rate and loan tenure (in years).
- Total amount payable: Add the principal to the total interest.
- EMI calculation: Divide the total amount payable by the loan tenure in months.
This method is commonly used in certain types of EMI, especially in personal and auto loans, but it may result in higher overall payments compared to the reducing balance method.
How is EMI calculated for reduce-balance method?
EMI calculated using the reducing balance method offers a more accurate representation of interest payments over the loan tenure. Here’s how it works:
- Principal amount: Start with the total loan amount.
- Interest rate: Identify the annual interest rate applicable to the loan.
- Loan tenure: Establish the duration of the loan in months.
- Monthly interest rate: Convert the annual interest rate into a monthly rate by dividing by 12.
- Reducing balance: The interest is calculated on the outstanding principal, which decreases as you make payments.
- EMI formula: Use the formula:
EMI=P×r(1+r)n(1+r)n−1
where P is the principal, r is the monthly interest rate, and n is the number of months.
This method results in lower total interest payments over time, making it a popular choice for home loans and larger financial commitments.
What are the factors that influence your EMI payments?
Several factors come into play when determining the amount of your EMI:
- Loan amount: The principal amount that you borrow significantly impacts your EMI. A higher loan amount will lead to larger EMI payments.
- Interest rate: The interest rate charged by the lender is a critical factor. A higher interest rate increases your EMI, while a lower rate has the opposite effect.
- Loan tenure: The duration for which you take the loan affects your EMI. Longer tenures typically result in smaller EMIs, but you end up paying more interest over time.
- Credit score: Your creditworthiness influences the interest rate offered by lenders. A higher credit score may secure a lower interest rate, positively affecting your EMI.
Understanding these factors helps borrowers to make informed decisions, ensuring that EMI payments align with their financial capabilities.
Bajaj Finance Limited offers personal loans that can be repaid through affordable EMIs. You can opt for the Flexi Hybrid Loan and benefit from paying interest-only EMIs during the initial part of the tenure.
You can also make use of the Bajaj Finance Personal Loan EMI Calculator to determine your monthly instalments in advance. This calculator requires you to enter only three fields to calculate your monthly instalments: the loan amount, interest rate, and tenure.
The EMI Calculator also displays the breakdown of principal and interest amounts when calculating the EMI, as well as the overall cost of borrowing.
Calculate your EMIs online and apply for our personal loan.
