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What Is an EMI?

An EMI equivalent monthly installment is a financial term used in loan payments. It is a quick and easy method to pay off any type of loan. When a borrower takes a loan from a bank or NBFC, the repayment of the loan is mostly done in specified monthly installments. These fixed financial fees are known as EMI. The amount of EMI depends on the principal amount of the loan, the tenure and the interest rate. This monthly fee or amount of EMI is supposed to be paid on a fixed date to the bank by check or electronically.

Throughout the loan tenure, does the amount of EMI change or stay the same?

  • The change of the amount of EMI depends on the choices that the borrower makes in opting for and paying for a specific EMI plan.
  • Floating Rate – If the borrower opts for a floating rate, the amount of EMI will change each time the lender sets a new floating rate. But the borrower can ask the lender to change the loan duration instead of the EMI amount.
  • Prepayment of Loan Amount – If the borrower prepays the loan within the given term, the EMI amount changes. Prepaying the loan reduces the principal amount of the loan, and the interest rate changes according to the remaining principal. Here too, the borrower can ask the lender to change the loan duration instead of the EMI amount.
  • Opting for Progressive EMIs – Many times borrowers are unable to pay the EMI amount in large sums, so they opt for this option. Here many lenders offer to repay the loan in smaller EMI at the beginning of the loan repayment tenure. This is a fixed period.
  • After that, the borrower can repay the debt in larger EMIs.

How is EMI calculated?

  • The EMI of any loan is determined by looking at three factors: The principal amount of the loan: The principal amount of the loan refers to the amount that the borrower will obtain from the banks as a loan. This is the fundamental criterion for deciding the EMI. As the principal amount increases, the EMI also increases.
  • The Interest Rate: The interest rate is decided by the lender that will be applied on the borrowed amount or the principal amount. The interest rate is decided on the basis of the borrower’s income, credit history, repayment ability, etc. It differs from one bank to another.
  • Banks offer borrowers two types of interest rates: floating and fixed. The amount of EMI changes depending on the type of interest rate chosen by the borrower.
  • The Tenure: The tenure refers to the period of time in which the borrower is supposed to repay the loan with the interest rate. The tenure changes based on the type of loan, the borrower’s credit history and other eligibility details. The increase or decrease in tenure means the increase or decrease in the period of time to repay the loan.

What are the other fees a loan borrower must pay when opting for EMI?

  • The interest rate: the borrower has to pay an additional amount to the actual amount borrowed in the form of interest rate. Since the principal amount and interest rates are combined for an EMI, the borrower cannot avoid paying this additional amount.
  • Late Fees – If the borrower accidentally misses or forgets to pay a fee or EMI, the lender charges the borrower late fees. The amount differs from bank to bank, but they all take it. It is also bad for the borrower’s credit score.

Is EMI good for loan payments?

EMI is the best option to pay any debt. It’s easy, hassle-free, and doesn’t limit the borrower’s financial plan. With many banks now offering flexible EMI terms, repaying loans has never been easier.

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