How does equated monthly installment work

The amortization table will include details such as the scheduled payments, the principal borrowed and the interest expense of each scheduled payment. It helps to understand how the loan works and also to know the interest-related details for claiming tax benefits.

See also: All about home loan income tax benefits. The EMI will be calculated based on the formula mentioned above. See also: Home loan interest rates and EMI in top banks. Since fixed interest rates keep you relaxed about the EMI payments, the amount of which remains constant, you can opt for it as it will give you a sense of certainty about your payments, especially if you do not want to take risks of increasing interest rates.

Ideally, it is suitable if the loan term is between three to 10 years. However, opting for a floating interest rate is advisable, if it is a long-term loan of 20 or 30 years.

Choose a floating interest rate when you know that the base rate will remain constant or low over a period. You can plan for prepayments and reduce the total interest on your loan, thereby, saving a lot. See also: Fixed vs semi-fixed vs floating home loans. The equated monthly installment or EMI is calculated based on factors, such as loan amount, interest rate and tenure.

However, the amount you need to pay as EMI may vary during the course of the loan tenure, depending on certain conditions. An EMI calculator is a digital tool that computes the equated monthly installment, i. The tool enables borrowers to know the actual EMI amount payable every month.

See also: Best banks for home loans in This method requires adding the principal loan amount and the interest on the principal sum and then dividing the outcome by the product of the number of periods and number of months. Products IT. About us Help Center. Log In Where do you want to login? Sign Up. Income Tax Filing. Expert Assisted Services. Personal Finance Loan Basics. Key Takeaways An equated monthly installment EMI is a fixed payment made by a borrower to a lender on a specified date of each month.

EMIs are applied to both interest and principal each month so that over a specified time period, the loan is paid off in full. EMIs can be calculated in two ways: the flat-rate method or the reducing-balance method. The EMI reducing-balance method generally is more favorable for borrowers, as it results in lower interest payments overall. EMIs allow borrowers the peace of mind of knowing exactly how much money they will need to pay each month toward their loan.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. A fixed-rate mortgage is an installment loan that has a fixed interest rate for the entire term of the loan.

Loan A loan is money, property, or other material goods given to another party in exchange for future repayment of the loan value amount with interest. Learn About Loan Amortization Schedules A loan amortization schedule is a complete schedule of periodic blended loan payments showing the amount of principal and the amount of interest.

Amortization Amortization is an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time. What Is an Unearned Discount? An unearned discount is interest that has been collected on a loan by a lending institution but has not yet been counted as income or earnings. Partner Links. Related Articles. However, they trade just like stocks. Definition: EMI or equated monthly installment, as the name suggests, is one part of the equally divided monthly outgoes to clear off an outstanding loan within a stipulated time frame.

The EMI is used to pay off both the principal and interest components of an outstanding loan. The first EMI has the highest interest component and the lowest principal component.

With every subsequent EMI, the interest component keeps on reducing while the principal component keeps rising. Thus, the last EMI has the highest principal component and the lower interest component. In case the borrower makes a pre-payment through the tenure of a running loan, either the subsequent EMIs get reduced or the original tenure of the loan gets reduced or a mix of both. Similarly, in case the rate of interest reduces through the tenure of the loan as in the case of floating rate loans the subsequent EMIs get reduced or the tenure of the loan falls or a mix of both.

The reverse happens when the rate of interest rises. Suppose a person borrows Rs 1 lakh for one year at the fixed rate of 9.

The monthly payment schedule works out as follows:. Related Definitions. Browse Companies:. Mail this Definition. My Saved Definitions Sign in Sign up. Find this comment offensive?