New Delhi New Delhi: The key aspect of good financial planning is understanding equated monthly installments (EMIs). With EMI, one is able to handle a loan or even a purchase in terms of installments paid within a fixed time frame, without getting into any kind of financial stress. With the use of EMIs, one's cash flow control becomes better and planning for other expenses becomes easier. This repayment method also allows flexibility, allowing people to make larger purchases or investments without having to pay the entire amount at once. This article will explain what EMI is, how it works and why it is important to understand it for financial planning.
What is EMI?
EMI means equated monthly installment. It is a fixed amount that is paid by the borrower to the lender every month to repay the loan in a stipulated period. The two components of every EMI include principal and interest charges on the loan. Principal is the amount borrowed and interest is the cost of borrowing that amount. EMIs are a great option for individuals who want to finance high-value items like a home, car or electronics as they break down large expenses into payable monthly installments. Borrowers do not have to pay a huge amount at once as the amount becomes payable in instalments.
How does EMI work?
When a borrower takes a loan, the lender calculates the total interest for the loan period and divides it into equal monthly payments. This means that no matter how much interest is being paid at different stages of the loan, the EMI remains constant throughout the tenure. In the beginning, a larger portion of each payment goes toward interest, but over time, more of the payment goes toward reducing the principal balance.
The EMI amount depends on the following factors:
*Principal Amount: Total amount borrowed.
*Interest rate: The cost of borrowing money, either fixed or floating.
* Loan Tenure: The period during which the loan is to be repaid.
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