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EMI explained

EMI is an oft repeated term that is associated with any loan taken. Let us understand how EMI works and what are the different aspects associated with EMI. The EMI facility helps the borrower plan his budget. The EMI is calculated taking into account the loan amount, the time frame for repaying the loan and the interest rate on the borrowed sum.

An equated monthly installment (EMI) is the amount of money that is paid back to the lender on a monthly basis. It is essentially made up of two parts, the principal amount and the interest on the principal amount divided across each month in the loan tenure. The EMI is always paid up to the bank or lender on a fixed date each month until the total amount due is paid up during the tenure.

Now, you might assume that the equal parts of the principal and interest is repaid to the financial institution every month, however this not the case. During the initial years the interest component repaid is higher and during the latter years of repayment the principal component is higher. So, if you think you have paid half of the amount borrowed from the bank in 5 years in a 10 year loan tenure, that would not be the case. You would probably have reduced the total interest component due considerably and would have only repaid the interest component.

Here is a simple example that explains how the repayment of your EMI reduces your loan amount during repayment period leading up to the end of the loan tenure.

Here the loan amount is 100000, which is lent at a interest rate of 12% with a loan tenure of 12 months.

The monthly EMI is calculated at the annualized rate of 12% and amounts to Rs.8,885 per month with the total interest component amounting to Rs.6619.

You will notice that the Interest repaid decreases with each passing month and the principal repaid increases with each passing month. This means that with a larger loan amount of say 5 L with a longer tenure of 20 years, the interest component will be the greater portion of the EMI, which will reduce leading up to the loan tenure, while the reverse is true for the principal component.

 

Amortization Table

Month no.

Outstanding amount

Interest paid this month

Principal paid this month

EMI Payment for this month

1

100,000

1,000

7,885

8,885

2

92,115

921

7,964

8,885

3

84,151

842

8,043

8,885

4

76,108

761

8,124

8,885

5

67,984

680

8,205

8,885

6

59,779

598

8,287

8,885

7

51,492

515

8,370

8,885

8

43,122

431

8,454

8,885

9

34,668

347

8,538

8,885

10

26,130

261

8,624

8,885

11

17,507

175

8,710

8,885

12

8,797

88

8,797

8,885

 

Source: Bank Bazar

 

 

By vayaM CS