What is an EMI?

Be it a secured or unsecured loan, borrowing funds from banks and NBFC help in clearing a financial crisis. You can avail a secured loan to buy a house or upgrade to a new car. With the help of unsecured loans, you can fulfill your dreams to travel to a new place, pay for emergency medical care, plan a wedding, or pay for education.

However, all loans need to be repaid to the lender. An instant loan is usually repaid in parts called EMIs.

But what is an EMI and what does EMI stand for? An EMI or equated monthly installment is the monthly payment that the borrower makes to the lender. The EMI is paid on a particular date as decided by both parties.

The EMI amount has two aspects: the principal amount and the interest rate of the personal loan.

During the initial months when a borrower starts to pay the EMI amount, it is the interest that forms a major portion of the payment. As the borrower keeps paying the EMI amount, the interest reduces and the principal amount takes over as the major part of the repayment.

How does an EMI work?

Loan EMIs, or Equated Monthly Installments, are a common method of repaying loans. When you take a personal loan from Finnable, you will be required to make regular EMIs until the loan is fully repaid. Here’s how it works:  

  1. Loan amount and interest: When you borrow money from Finnable, the loan amount is determined based on your eligibility and the terms agreed upon. Additionally, an interest rate is applied to the loan amount. The interest rate represents the cost of borrowing and is typically expressed as an annual percentage rate (APR). 
  2. EMI calculation: The EMI is calculated based on the loan amount, interest rate, and tenure (repayment period) of the loan. The EMI amount remains constant throughout the loan tenure unless there are changes to the interest rate or other terms are agreed upon. 
  3. EMI components: The EMI consists of two components, namely, the principal amount and interest. Initially, a larger portion of the EMI goes towards paying off the interest, while the remaining amount is used to reduce the principal. Over time, the interest portion decreases, and the principal repayment portion increases. This process is known as the amortization schedule. 
  4. Timely EMI payments: It’s crucial to make your EMI payments on time each month. Delayed or missed payments may result in late payment fees, penalties, and negatively impact your credit score. Finnable provides various convenient methods for EMI payments, such as online payments, automatic deductions, or our personal loan mobile app, to help you stay on track. 
  5. Prepayment and foreclosure: Depending on the terms and conditions of the loan, you may have the option to make prepayments or foreclose the loan. Prepayment allows you to pay off a part of the loan or the entire outstanding amount before the original tenure. Foreclosure involves repaying the entire loan amount before the scheduled tenure.   

Understanding how loan EMIs work is essential for responsible borrowing and timely repayments. Finnable, as a loan provider, can provide detailed information about your loan terms, assist you in calculating your EMIs, and offer convenient payment options. We can also provide guidance on prepayment or foreclosure options to help you manage your loan effectively.

Factors that affect your EMI amount

Before availing a personal loan, it is important to calculate the EMI. The basic purpose of doing so is to be aware of how much money you will be repaying every month to the lender. This helps in financial planning as a portion of the borrower’s salary will be dedicated to paying the EMI. Borrowers can use a personal loan EMI calculator to know their monthly repayment amount. 

         Before calculating the EMI amount, there are a few important factors that borrowers need to keep in mind:

  1. Loan Amount:

    This is the principal loan amount that is availed by the borrower. During loan repayment, the principal loan amount is split into smaller portions throughout the tenure of the loan. What borrowers need to remember is this – higher the loan amount, higher the EMI amount. 

  2. Credit Score:

    A credit score or a CIBIL score plays a very important part when it comes to EMIs. If a borrower has a high credit score, there is a possibility that he will be able to avail a personal loan with a lower interest rate.

    This means the EMI amount may be low as well. However, borrowers with bad or negligible credit scores may have to pay higher interest on their personal loans and, in turn, pay higher EMIs.  

  3. Interest Rate:

    The interest rate is the charge that the lender levies on the principal amount borrowed. Borrowers can choose between fixed and floating interest rates. If they choose a fixed interest rate, this would mean that the EMI will be paid at the same interest rate throughout the loan tenure. Floating interest rates, however, are regulated by the Reserve Bank of India and will vary throughout the loan tenure. This means that borrowers will not pay a fixed amount as EMI. Borrowers may pay higher or lower EMI amounts depending on the base rate at the time of payment.
  4. Loan Tenure:

    Tenure of the personal loan is the duration through which the loan is to be repaid. Choosing a short loan tenure would mean that borrowers may pay high EMI amounts for a short period and vice versa.

How to calculate EMI?

Once the loan amount and the loan term have been decided by the borrower, calculate personal loan EMI using an EMI calculator. Based on the three factors, borrowers can calculate the EMI using the mathematical formula given below

P x R x (1+R)^N / [(1+R)^N-1]

Here, P is the principal loan amount, R is the Rate of interest and N is the tenure or the number of monthly installments of the loan.
Assuming that the borrower has availed a personal loan of Rs 2 lakh with a 10% rate of interest while the loan tenure is for 12 months.
Rate of interest is calculated monthly as Rate of interest/number of months/100= 10/12/100= 0.0083
Hence, the EMI amount for a loan of Rs 2 lakh would be:

2,00,000 x 0.0083 x (1+0.0083)^12 / [1+0.0083]^12-1] = Rs 17584.00

A cash crunch can occur unexpectedly at any given time. Instead of running from pillar to post to gather funds, an unsecured personal loan can give you the reprieve you need. You can avail a travel loan, wedding loan, education loan, and medical loan from Finnable.

Calculating the personal loan EMI payment before availing the loan helps borrowers budget their funds accordingly. They can use Finnable’s online loan EMI calculator to find their EMI amount instead of manually calculating. We at Finnable provide quick and easy personal loans, with affordable interest rates and flexible tenure so borrowers can choose the personal loan EMI they are financially comfortable with.

FAQs About EMI

EMI stands for Equated Monthly Installment. It is a fixed amount that borrowers need to repay every month to the lender for the duration of the loan. The EMI includes both principal and interest components, allowing borrowers to gradually repay the loan over time.

The EMI amount is calculated based on the loan amount, interest rate, and tenure of the loan. Finnable and other lenders use the following mathematical formula to determine the EMI amount.

In most cases, the EMI amount remains fixed throughout the loan tenure. However, certain loan types, such as adjustable-rate mortgages or floating-rate loans, may have EMIs that can fluctuate based on changes in interest rates.

Finnable offers various convenient methods to make EMI payments. These may include online payment options, automatic deductions from your bank account, and payment through our mobile app. 

Yes, in many cases, borrowers have the option to make prepayments or foreclose the loan before the scheduled tenure. Prepayment allows you to pay off a part of the loan or the entire outstanding amount before the original tenure, reducing the overall interest paid. Foreclosure involves repaying the entire loan amount before the scheduled tenure. 

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