Updated on October 4, 2023
The term EMI is quite common in today’s world and every person seeking a loan has to first understand this concept to know their obligations and the impact of not following them. The meaning of this term and its relevance is given here.
Meaning of EMI
EMI stands for Equated Monthly Installment, and it is a common term used in the context of loans. An EMI is a fixed monthly payment that a borrower makes to repay a loan, consisting of both principal (the amount borrowed) and interest (the cost of borrowing).
Understanding EMI in detail
EMI payments are consistent and predictable over the entire loan duration, assuming a fixed interest rate. Borrowers benefit from knowing their monthly obligations, simplifying financial planning. Initially, a substantial portion of the EMI services the interest, with a smaller part going toward principal reduction. As the loan matures, more of the EMI is directed towards paying off the principal, gradually reducing the outstanding balance. The loan’s duration determines the total number of EMIs required for complete repayment. Shorter terms mean larger EMIs but lower overall interest costs, while longer terms result in smaller EMIs but higher total interest payments. The interest rate significantly impacts the EMI amount, with higher rates leading to larger EMIs and lower rates resulting in smaller EMIs, assuming other factors remain constant.
How is understanding EMI relevant for borrowers?
A clear understanding of Equated Monthly Installments (EMIs), provides borrowers with the ability to effectively manage their finances by offering predictable monthly payments. Knowing how each EMI is divided between interest and principal helps borrowers track their loan repayment progress. Additionally, this understanding aids in making informed decisions regarding loan tenure and interest rates, striking a balance between manageable monthly expenses and minimising the overall interest burden.