Understanding EMI Calculations
Everything you need to know about Equated Monthly Installments
EMI (Equated Monthly Installment) is a fixed payment amount made by a borrower to a lender at a specified date each month. EMIs are used to pay off both the principal and interest on a loan over time, making it easier to budget for loan repayments.
Reducing Balance vs Flat Rate
Reducing Balance Method
Interest is calculated on the outstanding principal balance each month.
- • Lower total interest cost
- • Used by most banks
- • Better for borrowers
Flat Rate Method
Interest is calculated on the original loan amount for the entire tenure.
- • Higher total interest cost
- • Used by some NBFCs
- • Higher effective interest rate
Example Comparison: ₹10 Lakh Loan at 10% for 5 Years
Reducing Balance:
EMI: ₹21,247
Total Interest: ₹2,74,823
Flat Rate:
EMI: ₹25,000
Total Interest: ₹5,00,000
Factors Affecting Your EMI
Principal Amount
Higher loan amount means higher EMI. Consider making a larger down payment to reduce your EMI burden.
Interest Rate
Even a 0.5% difference in interest rate can significantly impact your total cost over the loan tenure. Always compare rates from multiple lenders.
Loan Tenure
Longer tenure means lower EMI but higher total interest. Shorter tenure has higher EMI but saves money on interest overall.
Frequently Asked Questions
What percentage of my income should go to EMI?
Financial experts recommend keeping your total EMIs (including all loans) below 40-50% of your monthly income. This ensures you have enough for other expenses and savings.
Can I prepay my loan to reduce EMI?
Yes, most loans allow prepayment. You can either reduce your EMI amount while keeping the same tenure, or keep the same EMI and reduce the tenure. The latter saves more on interest.
What happens if I miss an EMI payment?
Missing EMI payments can result in late payment fees, higher interest charges, and negative impact on your credit score. Always set up auto-debit to avoid missing payments.