An EMI Equated Monthly Installment is a financial term used in loan repayments. It’s a quick and easy method to pay off any type of loan. When a borrower takes a loan from a bank or NBFC, the repayment of the loan is done mainly in specific monthly installments. These fixed financial installments are known as EMIs. The amount of EMI is dependent on the principal loan amount, tenure and the interest rate. This monthly installment or EMI amount is supposed to be paid on a fixed date to the bank by cheque or by electronically.
Do the EMI amount changes during the loan tenure?
The changing of EMI amount depends on what choices the borrower makes while opting a specific EMI plan and paying it.
Floating Interest Rate: If the borrower opts for a floating rate of interest, the amount of EMI will change every time a new floating rate is set by the lender. But the borrower can ask the lender to change the tenure of the loan instead of the amount of EMI.
Prepaying the Loan Amount: If the borrower pre-pays the loan in the given tenure, the EMI amount changes. Prepaying the loan reduces the principal amount on loan and the interest rate changes according to remaining principal. Here too, the borrower can ask the lender to change the tenure of the loan instead of the amount of EMI.
Opting for Progressive EMIs: Many times the borrowers are unable to pay the EMI amount in huge sums, so they opt for this option. Here many lenders offer to repay the loan in smaller EMIs in the beginning of loan repayment tenure. This is a fixed period. After that the borrower can pay the debt in larger EMIs.
How the EMI is calculated?
EMI of any loan is determined by examining three factors:
The Principal Loan Amount: The principal loan amount refers to the amount the borrower will be getting from the banks as loan. This is the fundamental criteria to decide the EMI. As the principal amount increases, the EMI increases too.
The Rate of Interest: The rate of interest is decided by the lender which will be applicable on the borrowed sum or principal amount. The rate of interest is decided on the basis of borrower’s income, credit history, repayment capacity etc. It differs from bank to bank.
Bank offer borrowers’ two types of interest rates: floating and fixed. The amount of EMI changes as per the type of interest rate chosen by the borrower.
The Tenure: Tenure refers to the time period in which the borrower is supposed to pay off the loan with interest rate. The tenure changes as per the loan type, borrower’s credit history and other eligibility details. The increase or decrease in tenure means the increase or decrease in the time period to pay off the loan.
What is the extra costs borrower has to pay by opting EMIs?
The interest rate: The borrower has to pay extra amount than the actual borrowed amount in form of interest rate. As the principal amount and interest rates are combined to form an EMI, the borrower can’t avoid paying this extra amount.
Late fees: If the borrower by any chance misses or forgets to pay an installment or EMI the lender charges the borrower with late fees. The amount differs from bank to bank but is taken by everyone. It is also bad for borrower’s CIBIL score.
Is EMI good for loan repayment?
EMI is the best option to pay any debt. It is easy, hassle free and doesn’t constrain borrower’s finance plan. As many banks now-a-days offer flexible EMI terms, repaying loans has never been easier.