All About EMI


What is an EMI?

EMI (Equated monthly instalments), as the name suggests, is the fixed amount that a borrower has to pay back to the lender every month. The EMI comprises both the principal amount and the interest component on a loan for each month, and the accumulation of these amounts is fully paid off by the borrower within a specified duration till the life of the loan. You may borrow loan products, such as Home Loan, Medical Loan, Personal Loan, Education Loan, and more at the EMI repayment schedule.

KEY TAKEAWAYS

  • Before availing of a loan, it is advised to compare EMIs concerning the loan amounts offered by different lenders while using the EMI calculator.
  • Be it Home Loan, Personal Loan, or Car Loan, every EMI calculator works on the same parameter. However, the difference lies in the maximum principal loan amount that you can fill in while using the respective calculators to determine the value of the EMIs.
  • Remember that the EMIs computed by the bank might differ from what you calculated using the EMI calculator if the inputs, such as the loan amount, interest rate, loan tenure, processing fee, etc., approved by the bank are different.
  • If your CIBIL score is above 750, your payment defaults can be the reason for the Personal Loan rejection.

Components of EMI calculation

The two major components of EMIs are the principal or original loan amount and the interest rate, which is zeroed in on by the lender based on the principal amount.

Here, the interest amount can be calculated using either simple interest or compound interest. The simple interest is calculated based on the principal loan amount, while the compound interest is determined based on the principal amount and its accumulated interest.

Let’s have a look at the EMI calculations using these two methods.

Example of EMI calculation

If you have borrowed a loan of ₹20,000 at an interest rate of 5% per annum, then you are supposed to repay an additional amount of ₹1,000 over and above the original loan amount.

It can be calculated using both the formulae, which are:

Simple Interest = P X R X n, where P = the principal amount, R = the annual interest rate, and n = the loan tenure.

Compound Interest = P X {(1+R) -t}, where again, P = the principal amount, R = the annual interest rate, and t = loan tenure.

Advantages of loan EMI calculator

  • The main advantage of an EMI calculator is that they assist you in determining the exact amount that you can comfortably pay off to the lender each month so that you can manage your budget accordingly and not end up in any financial distress.
  • It helps you opt for the best loan options offered by different lenders.
  • It also lets you decide on the amount and loan tenure according to your financial capacity.
  • Besides that, it also helps you maintain a transparent transaction history.
  • You can access an online EMI calculator at your convenience. It does not demand you visit your bank branch.
  • Calculating EMIs by hand or via handheld calculators can lead to erroneous results. Here the online EMI calculator proves useful as it helps you determine the right amount in no time and sans any error.

Methods of calculating EMI - flat rate vs reducing balance

When you avail of a loan, be it a Personal Loan, vehicle loan, Home Loan, Educational Loan, etc., you are always presented with two types of EMIs—flat or fixed interest rate EMI and reducing balance interest rate EMI.

Flat interest rate EMI: As the name suggests, a flat interest rate refers to the lending rate that remains unchanged during the entire loan tenure. Hence, the interest amount for the principal amount is determined at the start of the loan tenure itself. In this scenario, the financial institutions decide on the EMIs payable by you in advance, which helps in planning your finance beforehand. Flat interest rates are comparatively higher than reducing balance interest rates.

The formula for the flat interest rate EMIs is:

EMIs = (principal loan amount X entire loan tenure X annual interest rate) / total sum of instalments

Reducing balance interest rate EMI: It is also referred to as diminishing interest rate. In this scenario, the interest accrued is calculated based on the outstanding principal amount available at the end of a certain duration. Thus, a percentage of each EMI paid is applied to the principal amount, while the rest applies to the interest. So, the interest is computed on the outstanding principal amount rather than the original loan amount.

The formula for reducing balance interest rate EMI is:

EMIs = the outstanding loan amount X interest rate (applicable for each instalment)

The difference between both the interest rate calculations are:

  • The calculation of the interest rate for the fixed rate is comparatively simpler than a reducing balance loan.
  • The fixed interest rate is calculated on the principal loan amount sanctioned, while the reducing balance interest rate is determined on the outstanding loan amount.
  • The reducing interest rate initially reflects the effective interest rate, while a flat interest rate is equivalently higher.
  • The tenure of a fixed rate loan is usually longer as compared to a reducing balance loan.

What happens if you miss one or more EMIs?

Often, there are some unprecedented circumstances when the borrower faces trouble paying off the EMI for a few months. If you have also missed repaying an EMI, let us tell you that it has some major repercussions on your Personal Loan EMIs, which are as follows:

  • Affects credit score: If you delay or miss repaying an EMI payment, this instantly drops your CIBIL score to a lower number. Though missing one payment might have a minor impact on your credit score, the real problem surfaces when your credit rating falls to the extent that getting your future loan approved becomes difficult. Your credit score is a crucial factor that lenders use to evaluate your loan eligibility. Your CIBIL score is generated using your details, such as EMI amount, the repayment dates, pending amount, etc.
  • Affects borrowing eligibility: When you go for a loan, the lender prudently evaluates your credit report to get an estimate of your financial condition and associated risks. Suppose your credit score is low to the extent that it does not meet the lender’s eligibility criteria. In that case, it leaves an impression that you would not be diligent about paying your EMIs on time, which becomes a constraint to the approval of your loan application. If the reasons behind your late payments are not clear, they might choose to offer you a smaller amount than what you applied for, or they may charge you a higher interest rate.
  • Late fees and extra charges: Late EMI payments may attract additional charges on your loan amount. So, if you delay your EMI payment, it usually attracts a late fee that you need to pay in addition to the original EMI amount. And, if you repay your EMIs after the grace period, you will be labelled as a defaulter while attracting additional costs on the unpaid amount.
  • Loss of collateral assets: Sometimes, lenders demand you to pledge an asset as collateral against a Personal Loan. So, if you incessantly default on making your EMI payments, your lender may seize the assets pledged as collateral.
  • Legal implications: Your default on repaying EMIs on time might not put you behind bars, but it may attract some legal implications if that seems like a last resort to the lender. However, your lender takes such steps only when he is unable to retrieve the loan amount from you after multiple attempts.
  • Impact on the guarantor: Your EMI payment default affects not only your credit score but your guarantor’s as well, which might even prompt your lender to take some legal action against them.

Types of EMI calculators

  • Car loan EMI calculator: You may opt for the Car Loan EMI calculator to find an estimate of the monthly payments concerning a Car Loan. Bear in mind that the stipulated period for a Car Loan repayment is up to five years. So, if you delay paying your EMIs, the lender might seize your car to recover the balance loan amount. Hence, it is advised to use the Car Loan calculator to determine an EMI amount that you must be comfortable paying off. However, down payments are not considered when deriving an estimate of your Car Loan EMIs.
  • Personal loan EMI calculator: Personal Loans are usually taken to fund requirements, like medical expenses, travelling, etc. To compute your loan eligibility, the Personal Loan EMI calculator demands your information regarding your loan tenure, the current company you are associated with, total work experience, etc. This calculator assists you in evaluating your repayment capabilities and, thus, guides you to decide on a loan amount that you can comfortably pay off.
  • Loan Against Property EMI calculator: As the name suggests, you can avail of a Loan Against Property while mortgaging any of your property with the lender. Hence, you must use the Loan Against Property EMI calculator to determine the EMI amount that does not exceed your repayment capacity, or else your lender might seize the property pledged as collateral. This calculator also demands you to put in details such as loan tenure, loan amount, interest rate, etc., to determine your monthly payments.

Final words

EMI repayments are an integral part of a loan. Therefore, you need to diligently plan your budget before determining the EMIs that you can pay off with ease. As EMI payments ask you to keep aside a certain amount from your income each month, it is vital to opt for an EMI that does not leave a strain on your monthly budget. So, before you make the final move, do evaluate your repayment capacity by using a loan EMI calculator.

Other Words

  • Emergency Fund

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