EMI stands for Equated Monthly Installment. It is a fixed payment amount that a borrower makes to the lender on a specified date each month. EMIs are used to pay off both the interest and principal each month, so that over a specified period, the loan is fully paid off along with interest.
The formula to calculate EMI is:
EMI = [P × R × (1+R)^N]/[(1+R)^N-1]
Where:
Used to purchase residential property, with the property serving as collateral.
Unsecured loans that can be used for any personal expenses without collateral.
Specifically for purchasing a vehicle, with the vehicle as collateral.
Finances higher education expenses in India or abroad.
Funds for business expansion, working capital, or starting a new venture.
Loan against gold jewelry or ornaments as collateral.
The interest rate has a significant impact on your EMI amount. Even a small change in interest rate can substantially affect the total interest paid over the loan tenure.
For example, on a ₹20 lakh home loan for 20 years:
A 2% increase in interest rate leads to an increase of ₹6.22 lakhs in total interest payment!
A longer loan tenure reduces your monthly EMI amount but increases the total interest paid over the life of the loan.
For a ₹20 lakh loan at 8% interest:
Extending the tenure from 5 to 20 years reduces the EMI by almost 60% but increases the total interest by more than 4.5 times!
The principal loan amount directly impacts your EMI - a higher loan amount means a higher EMI at the same interest rate and tenure.
For an 8% interest rate and 20-year tenure:
The EMI and total interest paid scale proportionally with the loan amount.
Always compare loan offers from multiple banks and NBFCs before finalizing. Even a 0.5% difference in interest rate can save you thousands over the loan tenure.
Paying a higher down payment reduces the principal loan amount, resulting in lower EMIs and interest costs over the loan tenure.
If interest rates fall significantly, consider transferring your loan to another lender offering lower rates. Ensure the savings outweigh the transfer fees.
Utilize windfall gains like bonuses or tax refunds to make prepayments. This reduces the principal and subsequently the interest component of future EMIs.
Ensure that your total EMIs don't exceed 40% of your monthly income to maintain financial stability and avoid default risk.
Understand all terms and conditions, especially regarding prepayment penalties, processing fees, and interest rate reset clauses.
Online platforms connecting borrowers directly with individual lenders.
A flexible loan with a pre-approved borrowing limit that can be accessed as needed.
Short-term financing allowing purchases with delayed or installment payments.