Essential Insights on Equated Monthly Installments (EMIs) Explained
Equated Monthly Installments (EMIs) are a common term used to repay loans or debts, such as home loans, car loans, and personal loans. Each EMI consists of two components: principal and interest.
The primary method used to calculate EMI is the amortization formula, which is as follows:
[ \text{EMI} = \frac{P \times R \times (1+R)^N}{(1+R)^N - 1} ]
where:
- P = Principal loan amount
- R = Monthly interest rate (annual rate divided by 12)
- N = Total number of monthly installments (loan tenure in months)
This formula calculates a fixed monthly payment that covers both principal and interest, ensuring the loan is fully repaid by the end of the tenure.
This amortization formula assumes compound interest calculated monthly and spreads the repayment evenly over the tenure, with the interest portion decreasing and principal portion increasing over time.
EMI can also be calculated using financial tools like Excel's PMT function, online EMI calculators, or various other resources that implement the same underlying formula.
Factors affecting EMIs include the loan amount, interest rate, loan tenure, credit score, and more. In the initial period, the proportion of interest in the EMI is higher, and the proportion of principal repayments is lower. However, in later years, the proportion of principal increases, and the interest proportion decreases.
EMIs can be reduced or closed by prepaying the loan, partially repaying the loan, or transferring the loan to another lender offering lower interest rates. The total repayment over the loan tenure can be calculated by multiplying the EMI by the loan tenure, and the total interest paid over the loan tenure can be calculated by subtracting the total loan amount from the total repayment.
The principal balance is reduced after each repayment, and your EMI includes both interest and principal components. In the fixed-rate method, the interest amount remains unchanged over the complete loan duration, whereas under the reducing-balance method, interest is computed on the principal balance remaining after each payment.
A higher credit score can lead to a lower EMI, and the principal component is the repayment towards the original loan amount. EMIs can be calculated using the fixed-rate method or the reducing-balance method.
To make the calculation process easier, you can use the EMI calculator available on various platforms. This tool allows you to input loan amount, interest rate, and loan tenure to instantly get the EMI value.
References:
[1] Investopedia. (2021). Amortization. Retrieved from https://www.investopedia.com/terms/a/amortization.asp
[2] MoneyControl. (2021). How is EMI calculated? Retrieved from https://www.moneycontrol.com/news/business/how-is-emi-calculated-7495531.html
[3] BankBazaar. (2021). How to Calculate EMI. Retrieved from https://www.bankbazaar.com/loans/emi-calculator/how-to-calculate-emi.html
[4] ExcelJet. (2021). PMT Function. Retrieved from https://www.exceljet.net/formula/pmt-function
- Maintaining a high credit score can help lower your Equated Monthly Installments (EMIs) when applying for business or personal loans.
- A wealth-management service may provide useful resources, such as financial tools and online EMIs calculators, for calculating EMIs in your personal-finance or business-related endeavors.
- By utilizing an EMIs calculator, you can effortlessly determine the payment requirement for your loan, considering factors like loan amount, interest rate, loan tenure, and even your credit score.
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