What is EMI? How is it calculated?

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What is EMI? How is it calculated?
Equated Monthly Installment (EMI) is the amount paid by borrowers each month to lender of the loan. EMI can be calculated for a car loan, home loan, personal loan, gold loan etc. The principal amount borrowed and the interest are added and then divided by the number of months, an individual desires to pay the total amount. The installments thus derived are called EMIs. 

If you are planning to go for home loan, here are few tips.

The calculation of EMI is based on your interest rates, loan amount and the tenure of the repayment for the entire loan.

How is it calculated?

EMI comprises of two variable components those are principal amount and interest rate. The component of interest amount is higher in initial years and decreases over the years.

EMI is calculated using the factors like interest rates, loan amount and the tenure of the repayment.

Formula used is: EMI= (loan amount*interest) * (1+interest)^n
                                                                      [(1 + Interest)^n] - 1
Lets site an example:

  • Loan amount is Rs 10, 00,000/- 
  • Interest rate: 11/12= 0.0091
  • Loan period (n)= 15 years= 180 months

EMI = (loan amount*interest) * (1+interest)^n
                                              [(1 + Interest)^n] - 1

EMI = (10,00,000*0.0091) * 1+0.0091) ^180
                                             [(1+ 0.0091) ^180]-1

This EMI of Rs 11, 365.96 to be paid every month towards principal and interest amount.

Banks offer two different types of payment depending on what you opt for - fixed rate or floating rate. Click to know more on which is better.

Fixed Rate EMI

Fixed interest rate loans are those which remain same throughout the tenure. This can be best option only when interest rate have reached bottom, from where upward trend is expected.

Floating rate EMI

Floating interest rates move in tandem with market and RBI decisions which are prone to fluctuation depending on the market and economy.

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Read more about: home loan, emi
Story first published: Monday, April 1, 2013, 12:48 [IST]
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