Definition: An EMI, or equated monthly installment, is one component of the equally divided monthly outgoings required to pay off an outstanding loan within a specified time frame.
The EMI is determined by a number of factors, including:
1) Borrowed principal
2) Interest rate
3) The loan's term
4) Monthly/yearly rest period
The EMI for a fixed interest rate loan remains fixed for the entire loan term, provided there is no default or part-payment in between. The EMI is used to repay both the principal and interest components of a loan. With each subsequent EMI, the interest component decreases while the principal component increases. As a result, the final EMI contains the most principal and the least interest.
If a borrower makes a prepayment during the tenure of a running loan, either the subsequent EMIs or the original loan tenure are reduced, or a combination of the two. When a borrower skips an EMI during the loan's tenure (EMI holiday, cheque dishonour/bounce, insufficient balance in case of auto deduction of EMI, or default), either the subsequent EMIs or the loan's tenure increase, or a combination of both, in addition to incurring a financial penalty if any.
Similarly, if the interest rate falls over the loan's tenure (as in the case of floating rate loans), the subsequent EMIs fall or the loan's tenure falls, or a combination of the two. When interest rates rise, the opposite occurs.
Components of EMIs
EMIs are made up of two parts: principal and interest.
Initially, the interest amount exceeds the principal. The interest amount decreases as the loan term lengthens, while the principal amount increases. However, with flexible loans from Ruptok, you can pay the interest component as EMIs and choose to pay the principal at the end of the term. This significantly reduces your EMIs.
EMI Influencing Factors
Your EMIs are affected by three factors.
The loan amount: It is the amount borrowed and the primary determinant of your EMI. The greater the loan amount, the greater the EMI.
Interest rate: Another important factor influencing EMIs is the interest rate on your loan. The interest rate is directly proportional to the EMI. Lenders calculate interest based on a variety of factors such as your income, repayment capacity, credit history, current market situation, and so on.
Tenure: The third factor that influences your EMI is the term. Longer tenures typically result in lower EMIs, and vice versa. Longer tenures, on the other hand, imply a higher interest outgo.
Is the EMI variable during the loan term?
Under normal circumstances, the EMI remains constant throughout the term. However, there are some circumstances in which the EMIs may change, such as:
Floating interest rate: When you choose a floating interest rate, the interest rate changes according to market dynamics. EMIs fall when interest rates fall.
Loan repayment: If you pay off a portion of your loan, your EMIs will change. When you prepay, the principal amount decreases, which reduces the EMIs.
Progressive EMIs: Some lenders, particularly on long-term loans, allow you to pay progressive EMIs. This means that you pay a set amount as EMIs at first, which gradually increases as your salary rises. This allows you to pay off your loans more quickly.
As a result, EMIs are an important component of your loan. You can use online calculators to calculate your EMIs and create a repayment schedule to ensure you never fall behind on your payments.
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