What Is an Equated Monthly Installment (EMI)?

An equated monthly installment (EMI) is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly installments are applied to both interest and 澳洲幸运5开奖号码历史查询:principal each month so that over a specified number of years, the loan is paid off in𓆉 full. In the most common types of loans—such as real estate mortgages, aut൲o loans, and student loans—the borrower makes fixed periodic payments to the lender over several years to retire the loan.

How an Equated Monthly Installment (EMI) Works

EMIs differ from variable payment plans, in whichꦜ the borrower can pay higher amounts at his or her discretion. In EMI plans bo﷽rrowers are usually only allowed one fixed payment amount each month.

The benefit of an EMI for borrowers is that they know precisely how much money they will need to pay toward their loan each month, which can 澳洲幸运5开奖号码历史查询:make personal budgeting easier. The benefit to lenders (or investors the loan is sold to) is t꧋hat they can count on a steady, predictable income stream from the loan interest.

The❀ EMI can be calculated using either the flat-rate method or the reducing-balance (aks the reduce-balance) method.

Equated Monthly Installment (EMI) Formula

The EMI flat-rate formuꦕla is calculated by adding together the princip𓂃al loan amount and the interest on the principal and dividing the result by the number of periods multiplied by the number of months.

The EMI reducing-balance method is calculated using this fꦫormulaꦺ:

EMI = P * [( r * (1 + r)^n)) / ((1 + r)^n - 1)]

where:

P = Princiapl amount borrowed

r = Periodic monthly interest rate

n = Total number of monthly payments

Examples of Equated Monthly Installment (EMI)

To demonstrate how EMI works, let's walk through a calculation of it, using both methods. Assume an individual takes out a mortgage to buy a new home. The principal amount is $500,000, and the loan terms include an interest rate of 3.5% for 10 years.

Using the flat-rate method to calculate the EMI, the homeowner's monthly payments come out to $5,625, or ($500,000 + ($500,000 x 10 x 0.035)) / (10 x 12).

Using the EMI reducing-balance method, monthly payments would be approximately $4,944.29, or $500,000 * [(0.0029 * (1 + 0.0029)^120) / ((1 + 0.0029)^120 - 1)].

Note that in the EMI flat-rate calculation, the principal loan amount remains constant throughout the 10-year mortgage period. This suggests that the EMI reducing-balance method may be a better option because the dwindling loan principal also 澳洲幸运5开奖号码历史查询:shrinks the amount of interest due. In ꦑthe flat-rate method, each interest charge is calculated based on the original loan amount, even though the loan balance outstanding is gradually being paid down.

Equated Monthly Installment (EMI) FAQs

What does EMI stand for?

In the finance worldℱ, EMI stands for equated monthly installment. It refers to periodic payments made to settle an outstanding loan within a sti🦩pulated time frame. As the name suggests, these payments are the same amount each time.

How is EMI calculated?

There are two ways to calculate EMI: the flat-rate method and the reducing-balance (or🥃 reduce-balance) method. Both take into account the loan principal, the loan interest rate, and the term of the loan in their calculations.

How is EMI deducted from a credit card?

As soon as you purchase something on a credit card with an EMI option (that is, doesn't demand payment in full each month), your card's available credit limit is reduced by the total cost of the goods or service. The EMI on credit cards then works much like a home loan or a personal loan: You pay back the principal and interest each month, gradually reducing your debt over some time until you pay it off in full. EMI is deducted from a credit card using the reduce-balance method.

Is EMI good or bad?

EMI is neither inherently good nor bad—unless you consider borrowing and accruing debt bad, and paying for things in full the only "good" option. In terms of borrowing options, EMI does have its good points, though. Because it divides the debt into the same fixed payments each month, it helps borrowers budget their finances and keep in mind their outstanding obligations. They know how much they have to pay, and how long it will take them to settle their debt in full.