The full form of EMI is Equated Monthly Installment.
EMI, or Equated Monthly Installment, is a payment mode in which an individual repays a loan in equal monthly payments over a set period of time. The payments include both the principal amount borrowed and the interest charged on the loan.
What is Equated Monthly Installment (EMI)
A fixed payment made by a borrower to a lender each month on a specified date is referred to as an Equated Monthly Installment (EMI). This payment includes both interest and principal, and is made regularly until the loan is fully paid off over a specified number of years. This type of repayment method is commonly used in loans such as real estate mortgages, auto loans, and student loans where the borrower makes fixed, periodic payments to the lender.
The difference between EMIs and variable payment plans lies in the payment amount flexibility. In an EMI plan, the borrower is required to pay a fixed amount each month, whereas in a variable payment plan, the borrower has the option to pay a higher amount at their discretion.
For borrowers, the advantage of an EMI plan is that it provides certainty about the monthly loan payment, making it easier for them to plan their finances. On the other hand, for lenders or investors to whom the loan is sold, the benefit is a steady and predictable income stream generated from the interest charged on the loan.
Example of Equated Monthly Installment
For example, if an individual takes a loan of $10,000 at an interest rate of 10% p.a. for a period of 2 years, then the EMI would be calculated as follows:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
Where:
P = Principal amount ($10,000)
R = Interest rate (10% p.a. / 12 months = 0.833%)
N = Loan term (24 months)
EMI = [$10,000 x 0.833 x (1 + 0.833)^24]/[(1 + 0.833)^24 – 1]
EMI = $453.33
So, the individual would have to pay $453.33 every month for 2 years to repay the loan.
EMI is a convenient and hassle-free way to repay a loan as it helps to budget expenses and reduces the burden of a large lump sum payment.
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