Equated Monthly Installment (EMI)
Candlefocus EditorThe EMI system is based on the principle of compound interest, where the interest accrued on the principal is added to the total of what is owed. This amount is then split into an allocated number of payments throughout the loan repayment period. The advantage of EMIs is that borrowers have the confidence of knowing before entering into a loan agreement, just how much they will be expected to pay each month and for how long.
The calculation of EMIs can be based on two methods. Flat rate loans are usually calculated with a constant rate of interest applied over the entire term of the loan, with the same EMI payment for each repayment period. The reducing balance method allows for a more specific calculation, as it factors in the interest rate applicable for each period, which reduces the amount of interest payable. With this method, theinterest payments will generally reduce each month, as the amount borrowed decreases.
For those seeking loans or individuals managing debt or loan repayments, EMIs can provide greater budgeting control over any repayment schedules. It is also important to make sure that the EMIs will fit into any monthly budget. A loan should be taken out only if the borrower is confident that they will be able to manage their repayments.
The ease and convenience of EMIs are popular features of loans, allowing both borrowers and lenders the peace of mind of knowing precisely how much money needs to be paid, including any accrued interest payments. It is essential to thoroughly familiarize oneself with the terms of any loan agreement before making any commitment, to ensure that the borrower understands their responsibilities and any potential risks.