EMI Full Form

Equated monthly installment, full form of EMI is a fixed amount paid by a borrower to a lender at a specified date each calendar month for a given period. EMI is used to pay off both interest and principal amount monthly until the repayment of the whole loan amount.

This article includes the objective of EMI, how it is calculated, its advantages and disadvantages along with the full form of EMI.

EMI Full Form | What is EMI?

EMIs are very different from variable payment plans wherein the borrower can make higher payments, but in EMIs, borrowers are allowed to make fixed payments each month provided there is no default or part payment in between.

The benefit of an EMI for borrowers is that they know precisely how much money they will need to pay toward their loan each month, which makes their budgeting process easier.

How does it work?

EMI constitutes of the principal amount and a certain rate of interest to be paid where 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 with every subsequent repayment. The rate of interest depends on the amount borrowed, the duration for which it is borrowed and the lender.

Calculation of EMI

Following parameters are required to produce the exact amount of monthly installments:

  • Loan amount/principal amount – The amount borrowed by the lender
  • Tenure period- The time asked by the lender to repay the loan amount with interest.
  • Interest Rate – Rate charged by the lender as the interest on the principal amount.
  • Processing Fee (If any): The amount to be paid as monthly installments are can be derived by using the Flat interest rate approach and Diminishing Balance interest rate approach.
  • Flat Interest Rate – Under this approach, the interest is calculated on the principal amount which remains constant throughout the tenure period. It is applied generally on short term loans.

For example,

Principal amount: Rs 500,000
A rate of interest: 6.5%
Total duration: 3 years

EMI= {500000+ (500000*3*6.5/100)}/(3*12) = Rs 16,597

  • Diminishing balance interest rate:

Under this approach, the interest is calculated on the borrowed principal amount for the first month and the subsequent months’ interest is calculated on the outstanding loan amount. For example-

Principal amount: Rs 500,000
Rate of interest: 6.5%
Total duration: 3 years

EMI = [P x R x (1+R)^N]/[(1+R)^N-1

[( 500000*.065)*(1+.065/12)^36] / [(1+.065/12)^36-1]= Rs 15324

Advantages of EMI

  • Consumers with a steady flow of income can afford items by making payments in an installment that they would not have been able to purchase by making full payments. Thus an EMI gives freedom to purchase a home, car, home appliances, cell phones, which they can’t make lump sum payments.
  • One can choose the amount of installment payment and the duration for repayment of the whole principal amount according to their financial condition, under the EMI scheme thus providing flexibility in payments.
  • The EMI option omits the presence of middleman for processing the loan.

Disadvantages of EMI

  • EMI is a long term debt. One has to pay the number of installments until the entire loan is paid off.
  • One doesn’t have to pay interest if the payment is made all at once, thus saving the interest cost.
  • There is no room for escape if one fails to make timely payments. One may face consequences like repossession of purchased commodities, heavy penalties and strict legal action.

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