Updated February 17, 2023
Overview of EMI
You must have seen the advertisements in any bank or financial institution, like car loans at easy EMI or getting your house at low EMI rates. The main advantage of this EMI is that you can invest in expensive products from homes, laptops, cars, homes, etc. At the time of payment of these things, you must make an initial payment, and the remaining amount you can pay via EMI every month. It reduces the burden of investing a lot of money in a moment. Every month an individual can pay the EMI and complete the entire payment for their desired thing.
If you want to know more about EMI, you have arrived at a good article that will help you understand everything about it.
Definition & Full Form Of EMI
Let us begin with the full form of this EMI.
The full form of EMI is Equated Monthly Installment. It is a finite amount that a lender must repay a lender on a particular timeline each month for a defined period. An EMI is a principal and interest that the borrower needs to pay for a certain number of months or a year to pay off the loan ultimately. As a result, there is unequal access to the principle and interest sums.
For example- You purchase a phone for Rs. 15,000. Now, you may spend a small amount. Now let’s say you can make an initial payment of Rs. 4,000 (hypothetical amount). You can pay the rest of the amount via the EMI option over a given period.
Therefore, the principal is repaid with these payments and rates of interest to ensure that it can readily pay the financing in segments over a specific time frame.
Where Does EMI apply?
With some loans, such as vehicle loans, school loans, mortgages on real estate, and many others, EMI performs incredibly well. The loan recipient pays the bank set monthly installments for a long time until the overall loan balance payback, where EMI applies.
Difference Between Loan & EMI
When an individual lends a particular summation of money from a financial institution or bank, it is known as a loan. In such cases, a written agreement is a sign between the lender and the bank. The lender must return the borrowed sum and the specified interest rate within a specific time. At the same time, the monthly payment you make toward your loan to a particular interest rate over a defined loan term is called EMI.
The Major Components Depending On EMI
- Rate of Interest
- The initial borrowed amount
- Yearly time frame
- Duration of the loan
Calculation Of EMI
With the help of a Flat Interest Rate, you can calculate EMI. Check below the example to learn more about Flat Interest Rates.
Flat Interest Rate
The flat interest rates are applicable on short loan purposes, e.g., two-wheelers or cars. Despite accounting for the fact that the outstanding balance is reduced with every EMI, compute the rate of interest on the whole principal loan. For instance, an individual who wants to invest in a scooter takes a two-wheeler loan of 2 lakhs at an interest rate (flat) of 10% and has to repay it within three years. Hence, the EMI calculation will be as follows:-
Principal amount- 200,000
Flat rate of interest- 10%
Duration of Time- 3 years
EMI- Principal Amount / duration of time + interest @ 10% of Principal amount divided by 12 months
200,000/36 months+ 10% of 2 00,000 divided by 12 months
= 5,555.55+ (20,000/12)
= 5,555.55+ 1,666.66
In this case, the EMI would be Rs. 7,222.21/- per month.
Benefits Of EMI
The following are the advantages that an individual can get from EMI-
- Individuals can purchase products that are out of the budget with the help of easy EMI loans. It helps to lessen the burden of paying a lump sum amount to buy anything in one go.
- As there is no via between the lender and borrower, you will not have to pay any extra commission charges. Every month, you only have to repay the EMI.
- You can select which institution or bank offers low EMI rates according to your budget and financial system. It will help you to pay the amount of EMI without affecting your savings.
EMI helps you pay off your loan without feeling overwhelmed by large payments. With various online calculators, you can check the EMI amount you have to pay, and you will always succeed in the payment dates.
We hope that this EDUCBA information on “Full Form Of EMI” was beneficial to you. You can view EDUCBA’s recommended articles for more information,