What Does Emi Mean?

In life, there are phases when people realise that they require more than their savings to meet an urgent requirement. These emergencies can happen anytime and people first approach their friends and relatives to borrow money, however they may contribute smaller amounts. In case the requirement is a large sum, people usually approach financial institutions. These lenders provide the required amount as a loan, which can be repaid in smaller portions of the money called Equated Monthly Instalments (EMI) over a longer period of time. This helps with upfront monetary help in critical times and paying back the credit in parts monthly. 

So, you may wonder what exactly is an EMI here? An EMI is a fixed amount that a borrower pays to a lender at a specified date each month. This fixed amount includes both the principal and interest components. The aim is to make the repayment process more manageable and predictable for the borrower. Understanding the intricacies of EMI can help borrowers plan their finances better and avoid pitfalls associated with loan repayments. Let's delve deeper into the concept, working, calculation, and benefits of EMI.

What Is An Emi?

An EMI is a fixed monthly payment made by the borrower to the lender. It ensures that the loan is repaid over a specified period in equal amounts. This system helps in making large financial commitments more manageable by breaking them down into smaller, regular payments.

How Does EMI Work?

EMIs break down the total repayment amount into equal monthly instalments. These instalments are designed to cover both the principal and the interest on the loan. At the start of the loan tenure, a larger portion of the EMI is dedicated to the interest payment. As the tenure progresses, the interest component decreases while the principal repayment increases. This structure is known as amortisation. The borrower chooses a tenure and interest rate that suits their financial situation, making it easier to manage monthly expenses.

Read Also: Pre-EMI and Full-EMI - Understanding the Difference

How is EMI Calculated?

EMIs can be calculated using the following formula: 

EMI=P×R×[(1+R)^N/{(1+R)^N-1}]

Where:

• P = Principal loan amount

• R = Monthly interest rate

• N = Number of monthly instalments

For example, for a loan of Rs 1,00,000 at an annual interest rate of 12% for 1 year (12 months), the EMI would be calculated as follows: 

• P = Principal loan amount = Rs 1,00,000

• R = Monthly interest rate = Annual interest rate / 12 = 12% / 12 = 1% = 0.01 (in decimal)

• N= Number of monthly instalments = 12 months

So, EMI = 1,00,000×0.01×[(1+0.01)^12/{(1+0.01)^12-1]

       EMI = Rs 8895 per month

This formula helps in determining the exact monthly payment required to repay the loan over the specified period.

Factors Affecting your EMIs

Several factors influence the EMI amount. Here are the key factors:

• Loan Amount: The larger the loan amount, the higher the EMI, as the borrower needs to repay a bigger sum. The loan amount directly impacts the principal component of the EMI.
• Interest Rate: A higher interest rate increases the EMI because the cost of borrowing is higher. Interest rates are often based on the borrower’s credit score and financial history.
• Loan Tenure: Longer loan tenure usually results in lower EMIs but a higher overall interest payout, while shorter tenure increases EMIs but reduces total interest. The tenure should be chosen based on the borrower’s repayment capacity.
• Type of Interest Rate: Fixed interest rates keep EMIs consistent, whereas variable rates can cause fluctuations in EMI amounts. Borrowers should consider the stability of their income before choosing between fixed and variable rates.
• Credit Score: A good credit score often leads to lower interest rates, thereby reducing the EMI amount. Maintaining a high credit score by timely repayments and managing credit effectively can be beneficial.

Benefits To Adapt Emi Option

Opting for EMIs provides several advantages:

• Affordability: EMIs make high-value purchases affordable by spreading the cost over time. This enables consumers to buy items they otherwise might not be able to afford with their current savings.
• Budget Management: EMIs help in planning and managing monthly expenses better, knowing a fixed amount needs to be paid. This predictability helps in avoiding financial strain.
• Access to High-Value Purchases: EMIs allow consumers to buy expensive items like homes and cars without needing the full amount upfront. This increases purchasing power and financial flexibility.
• Improved Credit Score: Regular and timely EMI payments can enhance your credit score, making it easier to get loans in the future. A good credit score is crucial for accessing favourable loan terms.
• Encourages Savings: Knowing a fixed EMI amount needs to be paid encourages disciplined savings and financial planning. This habit can lead to better financial health and stability.

Types of EMI Loans Availability

Various loans can be repaid through EMIs, including:

• Personal Loan: Used for various personal needs like travel, medical emergencies, or education.
• Loan Against Property: A secured loan where the property is mortgaged for funds. These loan against property usually offers lower interest rates due to the collateral involved.
• Used Car Loan: Helps in purchasing a pre-owned car, repayable through EMIs. These used car loans make it easier to afford a vehicle without a large initial outlay.
• Two Wheeler Loan: Financing for purchasing a motorcycle or scooter with EMI options. These two wheeler loans are popular among young professionals and students.
• Business Loan: Funds for business purposes, which can be repaid through manageable EMIs. Business loans help in expanding operations, purchasing equipment, or managing cash flow.

Basic Steps to Apply Loan Online With 100% Digital Process

Applying for a personal loan online is now a straightforward process. Here are the basic steps:

1. Select Loan Type: Choose the type of loan you need (personal, business, etc.). Ensure that the loan type matches your financial requirement.
2. Check Eligibility: Ensure you meet the lender’s eligibility criteria. These criteria usually include age, income, and credit score requirements.
3. Calculate EMI: Use an online personal loan EMI calculator to estimate your monthly payments. This helps in understanding the financial commitment and planning accordingly.
4. Fill Application Form: Complete the online application form with your details. Make sure all the information provided is accurate to avoid delays in processing.
5. Upload Documents: Submit required documents like ID proof, Address proof, income proof, etc.
6. Approval and Disbursement: Once approved, the loan amount is disbursed to your bank account. This process is usually quick, especially with pre-approved loans.

Conclusion

EMIs offer a convenient way to manage loan repayments without straining your finances. They allow for disciplined financial planning and make high-value purchases accessible. Understanding how EMIs work, calculating them accurately, and managing them effectively are crucial for financial stability and growth. Proper utilisation of EMIs can lead to better financial management and help in achieving long-term financial goals.

Frequently Asked Questions

Is Emi Good Or Bad? 

EMI is a good option for managing large expenses, as it spreads the repayment over time.

What Is The Difference Between Emi And Loan? 

A loan is the borrowed amount, while EMI is the monthly repayment of the loan.

What Happens If I Never Pay Emi? 

Failing to pay EMIs can lead to penalties, a decrease in credit score, and potential legal action by the lender.

Is Emi Paid Per Month?

Yes, EMIs are monthly payments made to repay the loan over a specified tenure.

By understanding the nuances of EMI and following the tips mentioned, borrowers can manage their finances effectively and avoid potential pitfalls associated with loan repayments.

Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured product.