EMI Full Form : All you need to know!

EMI Full Form & EMI Simplified!

CategoryFull Form
Financial, Banking, LoanEquated Monthly Installment
EMI Full Form

What is an EMI?

A monthly equated installment (EMI), is a fixed amount that a borrower makes to a lender on a specific date each month. Equated monthly installments are applied to both interest and principal each month so that over a specified number of years, the loan is paid off in full. The most common loans are student loans, real estate mortgages and auto loans. The borrower pays a fixed monthly amount to the lender over a period of years, with the ultimate goal of paying off the loan in full.

An EMI is a fixed amount that a borrower pays to a moneylender for a specific period of time at a given date every month. EMI is a combination of principal amount and interest which a borrower will pay over a set period of time to pay off the loan. It’s a mixture of principal and interest rates.

It is an unbalanced combination of interest rate and principal. You should understand how banks calculate the EMI if you plan to borrow money from a bank. This will allow you to compare loan options and choose one that suits your financial needs.

How does EMI Work?

EMI full form
EMI full form

Variable payment plans are different from EMIs. In these cases, the borrower can pay higher amounts at their discretion. EMI plans allow borrowers to pay one fixed monthly payment.

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 make personal budgeting easier. Lenders (or investors who purchase the loan) have the benefit of a predictable, steady income stream from the loan interest.

You can calculate the EMI using either the flat rate method or the reducing balance (akas the reduce-balance).

Calculating the EMI flat-rate formula involves adding the principal loan amount to the interest on it, and then dividing that result by the number months multiplied by the number.

Multiple factors affect the EMI: (EMI Full Form)

  • Principal borrowed
  • Interest rate
  • The loan’s tenure
  • A monthly/annual resting period

The loan amount is also known as principal amount. The loan tenure is the time taken by the lender to repay the entire loan, plus interest. Banks charge an interest rate, as well as other lenders.

The EMI for a fixed-interest rate loan is fixed throughout the term, as long as there are no defaults or partial payments. The EMI is used for the payment of principal and interest on a loan. The first EMI has both the highest principal component and the highest interest component. Each subsequent EMI has a decreasing interest component and a rising principal component. The last EMI had the highest principal component but the lowest interest component.

If the borrower makes a prepayment during the tenure of a loan, the subsequent EMIs or original tenure of loan get reduced. Or a combination of both. If the borrower does not pay an EMI during the loan term (EMI holiday, cheque dishonor/bounce, or insufficient balance in the case of auto deductions of EMI or a default), then either the subsequent EMIs will rise or the loan tenure will increase. A financial penalty may also be imposed if this happens.

Similar to the floating rate loan example, if the interest rate drops through the term of the loan, the subsequent EMIs will be reduced or the tenure of loan falls. When the interest rate rises, it reverses.

Flat interest rate (EMI Full Form)

Interest is calculated on the entire principal loan, without taking into account the fact that each EMI reduces the principal amount. If a person is looking to purchase a car, they can take a 3 lakh loan at a flat interest rate of 12%. After the 3 year period, the EMI can then be calculated as follows:

  • Principal amount: 300,000.
  • Flat rate of interest: 12%
  • Total duration: 3 years

EMI: Divide principal amount (300,000.) by 36 months + 12.5% of principal amount by 12 months = 8333+3000=11.333

Interest rate on the balance is decreasing:

The interest rate for Diminishing Balance Interest Rate is variable each month. For the first month, interest is calculated using the entire principal loan amount. For the next months, interest is calculated using the remaining loan amount. Below is the formula or method for calculating the reducing interest amount.

  • Principal Loan Amount = 300,000
  • 12%: Interest rate reduction
  • Duration: 3 year Interest for first month = loan amount (300, 000)*(1/12*)*(12/100) =3000 Interest for second month= (outstanding loan amount)*(1/12)*(12/100)

Merits (EMI Full Form)

  • Power to buy: This allows you to purchase items that are beyond your financial reach, and you can pay it off in installments.
  • Flexibility: There are many EMI options available from different banks. You can choose the amount you wish to pay in installments, and the term of your loan depending on your financial situation.
  • There is no middleman: The lender pays the EMI directly without you having to contact a middleman.
  • Protects your Savings: You don’t have to make a lump sum payment. Instead, you will be making minimum regular payments.

Questions Frequently Asked

  • Full Form of EMI: Equated Monthly Installment
  • EMI ka Full Form: Equated Monthly Installment
  • EMI Meaning in Hindi: मासिक किस्त
  • Tenure Meaning: कार्यकाल

FAQs

What is the meaning of EMI in banking?

When you avail a loan for any purpose, you have to repay it through equated monthly instalments, better known as EMIs.

What is the full form of EMI?

The full form of EMI is Equated Monthly Instalments.

Also Read: FMCG Full Form : All You Need To Know!

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