An Equated Monthly Instalment (EMI) is a set payment sum a borrower gives to a lender on a predetermined date within each month of the calendar. These monthly instalments cover both interest and principal, gradually leading to the complete repayment of the loan over a specified span of years.
In prevalent loan categories like real estate mortgages, auto loans, and student loans, the borrower commits to making regular fixed payments to the lender over multiple years until the loan is fully settled.
How Does an Equated Monthly Instalment or EMI Work?
Equated Monthly Instalment (EMI) diverge from variable payment schemes, where borrowers can submit varying sums at their convenience. Under EMI frameworks, a predetermined fixed sum is established, requiring regular payment on a specific date each month. The primary objective of the EMI scheme is to facilitate improved financial organization for both borrowers and lenders while exerting a sense of commitment on the borrower’s part.
In essence, the EMI plan proves advantageous to both borrowers and lenders, making it the favoured approach for loan repayment compared to alternative schemes. Opting for EMI empowers borrowers by granting them a predictable monthly payment amount, thus enabling them to manage their finances prudently. On the other hand, lenders reap the benefits of EMI by enjoying a consistent and steady income stream generated through the monthly instalment payments made by borrowers.
As the popularity of Equated Monthly Instalments (EMIs) continues to surge, these plans have expanded beyond loans to encompass a variety of products, services, and even online shopping. This facilitates the acquisition of coveted items such as smartphones, laptops, and other high-value products, as individuals can choose to settle the total cost through manageable monthly instalments.
EMI Components
Your Equated Monthly Instalment (EMI) is divided into two fundamental elements: principal and interest.
- Principal Component: This aspect entails reimbursing the initial loan sum. Every EMI payment allocates a certain portion to principal repayment, progressively diminishing the outstanding loan balance over successive EMIs.
- Interest Component: This facet involves settling the interest during each instalment. Interest is computed based on the outstanding loan balance for the month and incorporated into your EMI.
During the initial phase, most of the EMI constitutes the interest. At the same time, the proportion allocated to principal repayment escalates over time, causing a corresponding decline in the interest component.
Factors Affecting EMIs
Several factors influence your EMIs, including the loan amount, interest rate determined by financial calculators, loan tenure, credit score, etc. Let’s delve into the specifics of each of these components.
- Principal: This signifies the sum borrowed from the financial institution. Your EMI and the principal amount share a direct correlation; a larger loan amount translates to a higher EMI, and conversely, a smaller loan amount leads to a lower EMI.
- Interest: This denotes the rate at which the money is borrowed. Interest and EMIs exhibit a direct relationship. When the interest rate is elevated, the EMI also increases, while a lower interest rate results in a reduced EMI.
- Tenure: This designates the duration the loan must be fully repaid. It maintains an inverse relationship with your EMIs. A prolonged loan tenure corresponds to lower EMIs, whereas a shorter tenure results in higher EMIs.
- Credit Score: Represented by a three-digit number, your credit score reflects your creditworthiness to potential lenders. A less favourable credit score might lead to loan offers with higher interest rates, subsequently elevating the EMI. It’s prudent to uphold a robust credit score to secure optimal loan terms. Generally, a credit score exceeding 750 is regarded as favourable.
Conclusion
Both options for loan repayment, EMI in arrears and EMI in advance, are valid, and the decision hinges on one’s financial circumstances. Opting for an advance EMI payment, accompanied by the down payment during loan disbursement, could be fitting for selecting EMI in advance. However, if your financial resources are insufficient at the time of loan disbursement, favouring EMI in arrears is a more suitable choice.
An online loan EMI calculator is recommended to assess the comprehensive cost of your loan under both EMI in advance and arrears scenarios. This tool facilitates a comparison of your options, enabling you to make an educated decision based on your specific financial limitations.
