Essential EMI Guide and its Breakup
April 24, 2022

The lending industry had come a long way – from when money lenders were the only source for borrowing funds. Records kept were hazy and repayment was haphazard with no accounting systems. Recovery of interest was primary and could be done at will. Credit was taken only in dire straits, and once taken debts never seemed to end.

Fast forward to the present! Credit is now an organized industry; banks and NBFC freely offer unsecured and secured credit to loan seekers in a regulated manner.

Credit has now become a way of life Credit cards are universally held and used for payments online and offline. Ambitions and aspirations are easily fulfilled with secured and unsecured loans available from banks and NBFC.

The mode of repayment had changed drastically from when actuals were repaid in crops, gold, ornaments, and land or recently by post-dated cheques.

With the advent of digital banking enabling online transactions, the EMI or Equated Monthly Installment is now universally accepted as the norm for repayment of loans.

Paying the monthly EMI is now a regular feature common to most. Getting to know how the EMI works is all-important and will assist in planning finances.

The EMI is debited from the bank account through the Electronic Clearing Systems (ECS).

After a loan has been approved, the customer must sign the agreement documents accepting the terms under which credit is given—included in the form for ECS, enabling the lender to deduct the monthly sum for the repayment electronically.

Thus, the EMI amount per the tenure fixed is taken from the applicant’s bank account on a designated date. In most of the cases, the applicant have the liberty to decide the EMI deduction date as per their own convenience.

Break-up of an EMI

Many are not aware that though the EMI remains fixed for the entire tenure, the component of the principal and interest amount varies month on month. Banks will first recover a significant portion of interest from the EMI as the term progresses, the interest amount decreases, and the principal increase.  After half of the tenure, you will be paying back more principal than interest.

It is helpful to keep an account of the current status of interest repaid and the principal balance.

If surplus funds are available to repay the loan, it is easier to decide if it is worth the while to repay the loan. At the tail end of the tenure, the cost of the loan has already been borne. Let the loan EMI continue for the entire term; the funds available can be put to better use.

The scenario is also worth considering when applying for a Top Up or a Parallel loan.

How is The EMI Calculated?

The EMI is calculated at a monthly reducing balance. As the tenure progresses, with the monthly EMI paid regularly and the loan amount owed reducing, interest will be applied to the loan’s principal balance. Therefore interest is to be paid on the reducing balance.

The EMI, though, remains the same but the composition changes. The interest chargeable is added according to the tenure to the Loan amount and divided into EMI or equated installments.

Regularly checking the same is essential to clarify what is owed to the lender and the interest amount being charged; it is an excellent option to take a balance transfer of the loan at a better interest rate.

Will The EMI Change if a Loan Holder Makes a Part Payment

The EMI for a personal or home loan remains fixed for the entire tenure a customer who wants to repay a part of the loan can do so per the stipulations.

Most individuals would like to repay debts as soon as possible when funds are available. If not the total debt but a part of it, but if the payee expects the monthly EMI will be reduced, that is not so.

The principal balance owed to the lender will reduce as per the payment made, and the repayment schedule will be adjusted. The tenure or the number of EMI to be paid will be diminished, but the amount remains the same.

The loan will have to be restructured or transferred to another lender to change the EMI.

Understanding the composition of the monthly EMI is necessary to know the extent of debt or the actual amount owed to the lender at any given time.

The EMI helps individuals build a better lifestyle, build assets, and take credit in emergencies that can be repaid conveniently, but understanding the working is not to be ignored; knowing how the EMI works will help keep credit users way ahead in their financial decisions.

How To Avoid an EMI Default

EMI is a convenient method for repayment of credit; after receiving the loan from a Bank/NBFC, it is the prerogative of the applicant to ensure a timely repayment. An EMI default can cost dearly as besides paying an escalated interest, the return will always reflect in your CIBIL and banking history. Here is our guide on 5 ways to avoid an EMI default to help you plan accordingly to safeguard against any EMI default.

Estimate Your EMI Amount Using EMI Calculators

The EMI calculator is used to arrive at the EMI payable for the entire loan amount. The EMI calculator can predict the amount you need to repay to the financer while considering your repayment tenure and the applicable interest rate.

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