Equated Monthly Installment, commonly known as EMI, is a fixed amount payable by the borrower to a lender at a specific date of each month. EMI's are used to pay both the principal and the interest amount every month over the number of years specified.
When the financial lending institutions lend a loan, the repayment is made in monthly instalments for specified years. The EMI is decided by calculating the principal amount of loan, and tenure along with the interest rate. The EMI amount should be paid on a fixed date to the bank by cheque or by any electronic forms. The principal component is always less than the interest component in the initial period of repayment, whereas the rate of interest decreases gradually.
The advantages and disadvantages of the EMI scheme are as follows:
Benefits of EMI:
Freedom to Buy Expensive things: The consumers can buy expensive utilities like jewellery, a vehicle, house, gifts etc; on EMI easily. As they get a chance to divide the amount in monthly instalments and pay quickly, they prefer to make purchases and enjoy the benefits.
Easy on Wallets: The borrowers can pay the loans in monthly instalments by opting the scheme of EMI. The amount of EMI is determined based on the principal amount of loan, tenure, interest rate and the ability of repayment. It is easier to pay off the said amount in small chunks every month. Thus they don’t have to filch their monthly expenses to afford the expensive utilities.
EMI Options by Banks: The banks are offering flexible EMI options to the borrowers as the EMIs are adjusted as per the needs of the borrower. They can choose the amount of instalment and tenure as per their convenience.
Absence of Agent: The EMI is directly paid to the lender, and there are no hassles of an agent or a middleman.
Longer Debts: The EMIs are paid by the borrowers until they are done with the principal amount along with the applicable interest rate. In terms of home loans or vehicle loan, the period to pay the EMI goes as long as 20 to 30 years. They spend nearly half of the life in repaying the instalments of the loan.
Early Repayment: If a borrower craves to pay the loan amount by using his extra savings, banks do not offer an easy option for repayment. The banks and NBFCs charge an early repayment fee to such borrowers. It is difficult for the borrowers to pay off the loan earlier even if they are capable of doing so.
Charges for Skipping EMIs: If a borrower craves to pay the EMI on or by the specified date, banks and NBFCs charge the borrower with late fees. They have strict terms when it comes to repayment through EMIs. Skipping the EMIs may lead the borrower to face legal action or their collateral can be taken away by the bank.
Extra Costs: The borrower is liable to pay an extra amount in the form of interest rate as compared to the actual amount borrowed. As the principal amount and interest rate are combined to form an EMI, he cannot regret paying the extra amount.
Additional Costs: If the borrower makes the payment at once while purchasing the commodity, then there is no need to pay any additional cost.
Prepayment Penalty: Prepayment of EMI is not allowed in many institutions, and if done, the borrower has to pay penalties for prepayment.