EMI or Equated Monthly Installment is a fixed amount paid by the borrower to the lender at a specified date each month. EMI’s are used to pay off both interest and principal amount each month for a certain period of time until the loan is fully paid. EMIs are very different from variable payment plans where in the borrower can make higher payments, but in EMIs, borrowers are allowed to make fixed payments each month.
How does it work?
EMI is fixed payments made every month as a part of loan repayment or a purchase. EMI constitutes of the principal amount to be paid and a certain rate of interest. The rate of interest depends on the amount borrowed, the duration for which it is borrowed and the lender. The principal component is lesser than the interest component in the initial period of repayment and the rate of interest will decrease gradually and the principal amount will increase over the period of repayment.
How to calculate EMI?
EMIs can be calculated by using EMI calculators that are available on the lender’s websites or financial websites. EMI calculators require a few parameters to produce the desired results.
- Loan amount
- Tenure period
- Interest Rate
- Processing Fee (If any)
Advantages of EMI
EMIs are a boon to people who depend on a steady source of income and are incapable of paying off lump sum amounts at a time. Listed below are some of the advantages of EMIs.
- Affordability: EMIs give the consumers the freedom to afford things that they won’t be able to make full payments for. EMIs lets the consumer make payments in installments thus allowing them the freedom to purchase a home, car, home appliances for which they can’t make lump sum payments.
- Flexibility: The EMI option lets you decide the amount that you want to pay in installment and the duration for which you want to make the payment depending on your financial situation and income.
- Absence of a middleman: The EMI is directly paid to the lender and there are no hassles of a middleman.
- Easy on the wallet: EMIs save you from burning a hole in your pocket since you only have to make minimal payments every month instead of a lump sum payment.
Disadvantages of EMI:
There are several disadvantages to EMIs. Listed below are some of the disadvantages of EMIs.
- Long Term Debt: EMI is a long term debt. One has to keep making payments till the entire loan is paid off.
- Additional costs: Additional costs in terms of interest. One doesn’t have to pay interest if the payment is made all at once.
- Prepayment penalty: Several institutions do not allow prepayment and even if they do there will be serious penalties that one will have to pay for prepayment.
Serious consequences: One will face serious consequences if one fails to make timely payments. The consequences might be as serious as repossession of purchased commodities, heavy penalties and strict legal action.
EMI Calculator – Calculate your EMI in 3 EASY Steps