An EMI or Equated Monthly Installment is a fixed amount payment made by a borrower to a lender at a specified date of every month. The monthly instalments are used to pay off both the interest and the principal each month so that after the specified number of years, the loan is paid off in full."
The benefit of an EMI is that they know exactly how much money they will need to pay for their loan each month, making the personal budget process easier.
An EMI is a financial term used for loan repayments. It is a quick and easy method to pay off the loan. When a borrower takes a loan from the bank or Non-Banking Financial Company (NBFC), the repayment of the loan is done mainly in instalments. The fixed financial instalments are known as EMIs. The amount of EMI depends on the principal loan amount, tenure and the interest rate. This monthly instalment is supposed to be paid on a fixed date to the bank by cheque or by electronically.
How EMIs work?
EMI is a fixed payment of amount every month as part repayment of a loan or a purchase. It constitutes the principal amount to be paid along with a certain rate of interest. The interest depends on the amount borrowed and the duration for which it is borrowed. The principal element is lesser than the interest element in the initial period of repayment and the rate of interest will decrease progressively and the principal amount will increase over the period of repayment.
How to calculate EMI?
EMI calculators require a few factors/parameters to produce the desired results.
- Loan amount
- Tenure period
- Interest Rate
- Processing Fee (If any)
Following are the few advantages and disadvantages of the EMI scheme
Freedom of Buying Expensive Utilities: EMI gives a chance to buy expensive utilities which one won’t be able to buy. EMI helps you to buy anything and everything, be it expensive household items, a vehicle, gifts, jewellery or a house. The consumers get a chance to divide the amount in monthly instalments and pay it off easily.
Easy to Repay: The borrower can pay the loan in instalments by opting for EMI. The amount is decided on the basis of the principal loan amount, time, interest rate and the borrower’s capacity of repayment. EMI makes it easier for the borrowers to pay the said amount in small portions every month. Hence they don’t have to pinch their monthly expenses to afford various utilities.
Flexible EMI Options by Banks: Many banks nowadays offer various flexible EMI options to the borrowers. The EMIs are decided as per the borrower’s needs. The instalment and tenure are decided by the borrower as per his or her convenience.
Affordability: EMIs gives the consumers the freedom to afford things that they won’t be able to make complete payments for. It lets the consumer make payments in instalments allowing them the freedom to purchase which they can’t make lump-sum payments.
The absence of a Middleman: The EMI is directly paid to the lender and there are no hassles of a middleman.
Longer Duration of Debts: The borrowers have to pay the monthly instalments until they pay the principal amount and the amount of interest rate. In terms of a car loan or home loans, the tenure goes as long as 20 to 30 years. Which means a borrower spends almost half of his or her life repaying the loan. Which restricts the borrowers from buying any other utilities in.
No Early Repayment: If a borrower wants to pay back the loan earlier than actual duration by using extra savings or a bonus, banks do not offer an easy option to do so. Many banks and NBFCs charge an early repayment fee. Which makes it difficult further for borrowers to pay off the loan earlier even if they could.
Charges on missing EMIs: If a borrower misses or forgets to pay the EMI by the given date, the banks and NBFCs charge the borrower with late fees. Missing multiple EMIs may lead the borrower to face legal action and their collateral can be taken.
Extra Amount: The borrower has to pay an extra amount than the actual borrowed amount in the form of the interest rate. As the principal amount and interest rate are combined to form an EMI, the borrower can’t avoid paying this extra amount.
Additional Amount: Additional amount in terms of interest. One need not pay interest if the payment is made at once.
Penalty for Prepayment: Many institutions do not allow prepayment and in case they do there will be a serious penalty that one will have to bear for the prepayment.