# 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.

## 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