What is EMI: Full Form, Meaning, and How is it Calculated?

Loans are of great importance as they can help you in unexpected times. Whenever you are in need of urgent cash or are experiencing a financial crunch, loans come to rescue you. When you take loans to buy homes, cars, or other items, you often pay back the borrowed money in smaller manageable amounts over time. These regular repayments to the lender are called EMIs or Equated Monthly Installments.

These EMIs allow you to repay your loans in easy, fixed monthly payments rather than in one large lump sum. Understanding EMI can not only help you plan your finances better but also ensure you can meet your repayment obligations. So, let’s move ahead and understand in detail what is EMI and how is it calculated, the importance of EMI payments, and more.

What Is EMI?

EMI stands for Equated Monthly Installment and it is a fixed payment amount made by a borrower to a lender at a specified date each month. The EMI includes repayment of the principal amount and the interest on the loan. Over the loan tenure, the EMI amount remains constant, unless there is a change in the interest rate or the repayment terms.

How Does an EMI Work?

Here’s how EMI payments work:

  • When you avail a loan, you pay an EMI every month to repay the loan. This EMI amount is usually fixed, which helps you plan your finances as you know the exact amount to be paid every month.
  • The EMI includes both interest and principal repayment.
  • The total loan period over which the EMIs are paid can range from a few months to several years. Longer tenures have smaller EMIs but also incur more interest over the loan period.
  • EMI payments are made on a fixed date every month. This helps in maintaining financial discipline and makes sure that borrowers do not miss payments.

How Is EMI Calculated?

The calculation of equated monthly instalments is quite easy to understand. The EMI for a loan can be calculated using the following formula: 𝐸 𝑀 𝐼 = 𝑃 × 𝑟 × ( 1 + 𝑟 )^𝑛 /[( 1 + 𝑟 )^𝑛 − 1] Now here, P is the principal loan amount, r is the monthly rate of interest (usually the annual interest rate divided by 12), and n is the number of monthly instalments.

Factors That Affect EMI

Loan Amount

The higher the loan amount, the higher the EMI. For example, a loan of ₹1,00,000 will have a higher EMI compared to a loan of ₹50,000, assuming the interest rate and tenure are the same.

Interest Rate

Higher interest rates increase the EMI amount. A loan with an interest rate of 15% will have a higher EMI than a loan with an interest rate of 10%.

Loan Tenure

Longer tenures reduce the EMI amount but increase the total interest paid. For example, a loan repaid over 20 years would have a lower EMI compared to a loan repaid over 10 years. However, the total interest paid would be higher.

Type of Interest Rate

The type of loan interest rate can impact the EMI amount over time. Fixed interest rates remain constant throughout the loan tenure, which provides stability in EMI amounts while floating rates can vary, which leads to fluctuations in EMIs.

Repayment Schedule

Monthly, quarterly, or biannual payments can affect the EMI structure. Monthly payments are most common, but some loans might offer different repayment schedules which can influence the amount and frequency of payments.

Features of Loan EMI

  • Fixed Monthly Payments: A fixed amount is paid every month, which makes it easier to plan and manage monthly finances.
  • Predictability: It is easy to budget as the amount doesn’t change. In this case, you would know exactly how much you need to pay each month.
  • Flexibility: There are often many options to choose loan tenure and repayment schedules based on your financial situation and repayment capacity.

Benefits Of Loan EMI

Benefits of EMI
  • As mentioned earlier, you have easier financial planning with fixed monthly payments. You can plan your monthly expenses without worrying about fluctuating loan payments.
  • EMIs help you break down large payments into smaller amounts. Hence, instead of paying a large sum upfront, you can spread the cost over several months or years.
  • Regular EMI payments can improve credit scores as timely payments would positively impact your credit history. With this, it would become easier for you to get credit in the future.
  • Automated payments make it easy to stay on track. Many lenders like CASHe offer the option of setting up automatic EMI payments from the borrower’s bank account.

EMI Mistakes You Must Avoid

Here are the major EMI mistakes you must avoid:

  • Ignoring loan terms
  • Over borrowing
  • Not considering future expenses
  • Skipping payments

Read More: Top EMI Mistakes You Should Avoid

Tips To Lower Your Personal Loan EMI

  • Negotiate Lower Interest Rates: Seek lower rates from lenders. Borrowers with good credit scores and financial histories can negotiate with lenders for lower interest rates, which can reduce the EMI.
  • Extend Loan Tenure: Increase the repayment period to reduce the EMI amount. While this reduces the monthly burden, it may increase the total interest paid over the loan period.
  • Prepay Part of the Loan: Make lump sum payments to reduce the principal. Prepaying a portion of the loan can significantly reduce the remaining principal and, consequently, the EMI.
  • Improve Credit Score: Better scores often result in lower interest rates. Maintaining a good credit score through timely payments and low credit utilisation can help in securing loans at better terms.

Also Read: How To Reduce EMIs of Your Existing Personal Loan

Conclusion

Now that you have understood the importance of EMI payments, you will be able to enhance your financial planning.

Also, if you are looking for great loan options with competitive interest rates, then CASHe is here for you. CASHe offers personal loans, car loans, home renovation loans, education loans, two-wheeler loans, etc. with easy EMI options, thereby, making it convenient for borrowers to manage their repayments without hassle. So, apply for an instant personal loan with CASHe App today and get the credit in your bank account instantly.

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CASHe Team Welcome to the CASHe blog, your trusted source for insightful articles on personal loans, credit lines, digital gold, finance, lifestyle, and more. Our team at CASHe is a dedicated group of writers, editors, and subject matter experts passionate about simplifying finance for our readers.

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