EMI or "Equated Monthly Installment" is a fixed monthly payment made by a borrower to a lender. It includes both the principal amount and the interest charged. EMI is commonly used for home loans, personal loans, and car loans.
EMI allows borrowers to understand their monthly repayment obligations. It also offers lenders a steady income stream and minimizes the risk of default.
To calculate EMI, use the following formula:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
P = Principal or loan amount
R = Monthly interest rate (annual rate/12)
N = Loan tenure in months
This formula determines the fixed monthly payment that a borrower needs to repay a loan over a specified period.
EMI Calculation Example
When a borrower takes out a loan, the lender calculates the EMI based on the loan amount, interest rate, and loan tenure. This EMI amount is then paid monthly until the loan is completely repaid.
For instance, for a home loan of Rs. 50 lakhs at 8% per annum for 20 years, the EMI amount, say Rs. 43,870, remains the same throughout the loan. However, the principal and interest components change over time. Initially, the interest component is higher, and the principal is lower. As the loan tenure progresses, the interest component decreases, and the principal increases until the loan is fully repaid.