EMI – Understanding the Term

EMI - Understanding the Term
Equated Monthly Instalment, which abbreviates to EMI is most common and probably the first term that you hear when scouting for a Loan.
So what exactly is EMI? To put it simply, EMI is the fixed amount paid by the borrower to the lender at fixed intervals (monthly). EMI consists of two parts – Interest & Principal, so, over the specified number of Years/Months, the Loan is paid in full.
Now, as mentioned above, EMI consists of both Interest &Principal. However, equal parts of Interest & Principal do not constitute an EMI. Initially at the start of repayment, the Interest part will be much higher than the Principal part, as the Principal outstanding is Higher at that point. As the repayment progresses, the Principal keeps reducing, hence reducing the Interest part of the EMI, and the Principal part of the EMI thus increases.
Let us see the following example and the EMI Amortisation chart to get the hang of the term:
Suppose, Rs. 10,00,000 is borrowed at the Interest rate of10% per year for One year (12 Months).
Now, the EMI for the above will Rs. 87,916. Total Interest paid during the year will be Rs. 54,991 & total repayment (Interest +Principal) will be Rs. 10,54,991.
Let us have a look at the amortization chart below to get a clear perspective:
Outstanding Principal Interest on O/s Principal Principal Paid EMI
1000000 8333 79583 87916
920417 7670 80246 87916
840171 7001 80915 87916
759257 6327 81589 87916
677668 5647 82269 87916
595399 4962 82954 87916
512445 4270 83646 87916
428799 3573 84343 87916
344457 2870 85046 87916
259411 2162 85754 87916
173657 1447 86469 87916
87188 727 87188 87916
54991 1000000
You can see how the Interest amount decreases as months go by and how the Principal amount increases.
Happy Loan Shopping

You can check out our EMI Calculator here.

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