An Equated Monthly Installment (EMI) is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. EMIs are used to pay off both interest and principal each month, so that over a specified number of years, the loan is paid off in full.
EMI is determined based on the principal amount, interest rate, and loan tenure. The formula for calculating EMI is: EMI = [P x R x (1+R)^N]/[(1+R)^N-1], where P is the principal loan amount, R is the monthly interest rate, and N is the number of monthly installments.
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In the initial years of your loan, a larger portion of your EMI goes toward paying the interest rather than the principal. As time progresses, this ratio shifts, and in the later years, you pay more principal than interest.
When considering a loan, it's crucial to understand how EMI works. A longer tenure means smaller EMIs but higher total interest paid over the loan's lifetime. Conversely, a shorter tenure results in larger EMIs but less interest paid overall.
Borrowers should always calculate their EMI before taking a loan to ensure it fits within their monthly budget. Using an EMI calculator like the one provided here helps you make informed financial decisions and plan your finances better.
It's also important to consider prepayment options. Making partial prepayments can significantly reduce your total interest burden and shorten your loan tenure. Many lenders allow prepayments after a lock-in period, though some may charge a small fee.
Remember that while EMIs make large purchases affordable through monthly payments, they represent a long-term financial commitment. Always borrow within your means and consider future financial obligations before taking on any loan.