Understanding Equated Monthly Installments (EMI) and Their Impact on Financial Planning
June 21, 2024

Equated Monthly Installments (EMI)

In today’s consumer-driven society, the availability of easy credit from banks and financial institutions has fuelled the desire for a better lifestyle and progress. Whether you’re in the market for a new home or a mobile phone, the option to make a minimum payment and convert the remaining balance into installments payable over a suitable period is a common practice. This is what we refer to as an EMI (Equated Monthly Installment), a financial tool that plays a significant role in managing your financial commitments.

Why Prioritise Your EMI?

When Applying for a Loan, it’s common for customers to focus on the interest rate and other charges. However, it’s equally important to consider the monthly installment. A manageable Equated Monthly Installment (EMI) is not just a financial obligation but a tool that allows you to repay the amount without straining your monthly budget, providing a sense of financial security and peace of mind.

How Does the EMI work?

Understanding how the EMI works is critical to effective loan planning. The interest rate applied to the loan amount issued to the customer is divided over the tenure for which the loan is sanctioned. Each EMI (Equated Monthly Installment) includes a part of the principal and the interest charged. For both mortgage and unsecured loans, the interest is charged on a monthly reducing basis. This means that with the payment of each installment, the amount of principal owed reduces, and the interest is applied to the reduced balance. Despite the changing ratio of principal and interest, the EMI remains constant for the entire tenure, making it easier to plan your monthly budget.

Benefits of an EMI Calculator

Before taking out a loan, using an EMI Calculator can be a game-changer. It allows you to determine the monthly installment in a flexible and adaptable way. You can adjust various parameters, such as the loan amount, interest rate, and repayment tenure, to find the most suitable installment. If the Calculated EMI seems too high, you have the power to consider extending the repayment term, applying for a lower loan amount, finding a lender with a lower interest rate, or opting for a shorter repayment term with higher EMIs. This tool provides a sense of reassurance and confidence in your loan planning, putting you in the driver’s seat of your financial decisions.

Using an EMI Calculator can help prospective borrowers determine a suitable EMI that fits their monthly budget, thus saving valuable time and effort during the loan application process. This efficiency in financial planning allows the borrower to focus on other essential aspects of their life, making them feel more productive and in control of their time.

What are the Advantages of an EMI?

The EMI has become part of daily existence, a tool that has helped millennia better manage life and emergencies. Salaried persons can dream of owning their home and going on a vacation by appending a home or Personal Loan and making the repayment via EMI. Financial shortfalls during emergencies can be met with a Personal loan. Banks such as HDFC Bank, ICICI Bank, and Axis Bank now disburse Personal Loans Online, and repayment is done with easy EMI over 12 to 72 months.

Self-employed individuals can Apply for a Business Loan to extend their existing work and upgrade their machinery. Financial shortfalls during weddings and family functions are conveniently met, and funds are repaid over monthly instalments or EMI.

Loans from Banks and NBFC fuel the Auto industry, and most individuals find it convenient to have their transport. With a minimal down payment, the cost of the vehicle is paid in monthly instalments for personal or commercial usage. Vehicles are movable commodities, so banks can recover them if the EMI is not paid.

Banks and financial institutions are prepared to provide funds and generate income from repayable loans, benefiting both the borrower and the lender.

The advantages of an EMI are immense, but let us consider a few Cons.

“When borrowing, it’s essential to clarify and understand the terms of the repayment schedule. Make sure that the payment of the EMI or the monthly installment comfortably fits your budget, as any delay or non-payment will negatively impact your credit ratings.

Keeping track of the EMI Payment dates and maintaining a sufficient balance is obligatory, as a bounce will negatively impact your record.

Accumulating many EMIs without proper budgeting can lead to a debt trap. Borrowing excessively for extravagant spending without considering your budget may also lead to financial difficulties. It’s essential to be mindful of this because banks and financial institutions are unlikely to lend to individuals who are overleveraged and paying too much towards their EMIs.

Repaying credit via instalments makes fulfilling obligations and comfortable living affordable, but this should not be taken for granted. The commodity is not yours until you have paid the amount due as an EMI or through a downpayment.

Know Your EMI

After the loan request is approved, an agreement is initiated between the borrower and the lending organisation, which mentions the terms and conditions of the loan. These include:

  • The interest rate.
  • Processing fees.
  • Insurance amount if required.
  • The tenure for the loan.
  • The monthly instalment. (EMI)

A loan repayment schedule is issued, giving details of each instalment and the component of the interest and principal deducted over the tenure of the loan.

The EMI amount for a Personal Loan is fixed at the time of disbursal and is deducted from the applicant’s account monthly. A floating interest rate is applicable for a mortgage loan, adjusted according to the PLR (Prime lending rate) declared by the RBI (Reserve Bank of India).

The customer’s prerogative is to maintain sufficient funds in the account to clear the EMI for all credit taken. A bounce or return will negate the Credit Score and the track record, whereas an on-time payment record for your EMI will go a long way in getting you additional credit when required with the best terms!

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