# What is EMI and How is it calculated?

Equated monthly installments, or EMI, are the figures used to determine the conditions of a loan. This is also referred to as amortization. The Equated Monthly Installments on a loan are the payments made to the lender each month for the loan’s remaining balance. This comprises both the principal and the interest.

## What is EMI?

An equated monthly installment (EMI) is a predetermined monthly payment made by a borrower to a creditor on a predetermined date each month. Monthly EMIs cover both interest and principal, and the loan is paid off over several years.

Equated Monthly Installments are a method of budgeting your money to pay for your mortgage, with the added benefit of having a significant portion of it automatically deducted from your account each month.

## How is EMI calculated?

EMI may be calculated in two different methods. These are the methods:

The method of a flat rate

In the flat-rate system, each interest charge is calculated using the initial principal amount as the loan is gradually repaid. The EMI is calculated by multiplying the whole loan principle by the total interest, then dividing the total by the number of EMI instalments, which equals the length of the loan period. On personal loans and vehicle loans, the flat rate technique is prevalent. Borrowers gain less since interest payments must cover the whole principal amount, resulting in a higher effective interest rate than when the balance is reduced.

The approach to decreasing balance

In contrast to the flat-rate system, the declining balance method bases interest payments on the outstanding principal. This implies that the interest and principal payments components of each EMI change. As a percentage of the outstanding loan, interest payments make up a higher amount of the EMI at the start of the loan period. As the loan is repaid over time, the interest amount reduces, and a bigger share of the payments goes toward principal repayments. In credit cards and overdraft services, this method is frequently used.

## Purpose of EMI

The purpose of Equated monthly instalments is to provide a predictable and affordable monthly payment plan for a mortgage. This will help ensure that you can maintain your home and pay off your mortgage as quickly as possible.

For several years, the borrower makes regular periodic repayments to the lender in order to pay off the debt. EMIs are particularly useful in loans such as mortgages, auto loans, and student loans.

## Benefits of equated monthly instalment

An equated monthly instalment (EMI) is a method of repaying debt in instalments rather than in one large sum. The amount you pay as your loan EMI is determined by the principal amount, loan tenure, and interest rates.

EMI, like most financial systems, has both advantages and disadvantages. Here are some things to think about before making a decision.

1. Equated Monthly Installments provide a predictable and regular payment plan.

2. Equated Monthly Installments are more affordable than traditional loans.

3. Equated Monthly Installments are easier to handle than traditional loans.

4. Equated Monthly Installments are an excellent way to pay off debt.

5. Equated Monthly Installments are a great option for people who are having trouble paying off their debt.

Also Read: The Power of Compounding

## What are the risks of EMI?

Following are some risks involved with equated monthly instalments.

1. There’s a chance the borrower won’t be able to keep up with monthly payments.

2. There is a potential that the interest rate on the loan will increase.

3. There’s a danger the borrower won’t be able to pay back the loan in the period allotted.

4. It’s possible that the borrower won’t be able to find a lender willing to offer an Equated Monthly Installment Loan.

5. There’s a danger the borrower won’t be able to pay back the loan in full.

## What are the considerations to take while choosing EMI?

The primary two key considerations to take into account when choosing EMI:

1. Emi length

The length of the equated monthly instalment contract will affect the price you pay and the amount of interest you will be charged. Short-term EMI contracts offer lower rates of interest, but have a shorter duration, while long-term contracts offer higher interest rates and have a longer duration.

2. Emi type

There are two types of equated monthly installments: fixed and Variable. Depending on the type of EMI interest rates are calculated.