You pay certain amount to them back in monthly instalments. The monthly instalments comprise of Principal amount and interest rate combined. So the loan bearer needs to pay back his loan to the bank in the form of instalments. But, What is the full form of EMI?
EMI Full Form is Equated Monthly Instalment. EMI is a systematic method of repaying loan amount each month. Equated Monthly Installment is a combination of principal amount and interest rate.
Whenever you take a loan from a bank or any financial institution, then you need to pay them back.
What Is an Equated Monthly Installment (EMI)?
EMI or Equated Monthly Instalment is a form of repayment to the bank. Let’s understand what is EMI and why bank charges interest on the repayment amount.
Bank provides the loan to different people and institutions. The bank charges interest on the loan amount from the party who have taken the loan. Bank provides you interest when you open your account in their branch. The interest you get is near 5% to 6% per annum.
When you take a loan from the bank then they charge you 11% to 14% of interest on different types of loans. The difference between interest provided and interest charged is the basis of bank profit which they earn throughout the year.
Now we know why interest is charged on loan and why it’s necessary for banks. Without interest, the bank can’t make money and sustain itself.
When bank calculate EMI through its given formula(We will understand formula shortly), it adds two main things in EMI or Equated Monthly Instalment amount i.e. the Principal amount and Interest rate.
At the start of the repayment cycle, Interest ratio is higher in EMI amount. During the last few years, the Principal amount becomes the majority in the EMI amount. This is done for a very reason.
How Bank Earn through EMI
When the bank gives loan to anyone then the party always pay back the loan during the first few years. However some people aren’t able to pay EMI during the last few years due to some reason, then bank only charges Principal amount from them in hope that they will pay back the principal full at least.
Loan Bearer or a person who takes loan become happy that he only need to pay back principal amount but he don’t know is that he had already paid back majority of EMI during first years and hence bank already made a profit from their customer. However, if you are not able to repay Loan EMI in last year’s and looking for principal amount payment only, then be ready for the decline in credit score. A credit score is very important for any loan borrower customer of the bank. Credit scores tell whether the customer can get a loan or not. Credit score use old loan repayment data(if any) and data acquired from person salary information and IT returns.
Failure to pay EMI or Equated Monthly Instalment on time will lead to declining credit score for the customer. This will hamper the future chances of a customer to get loans from any bank. Always try to maintain a great credit score so that you can get a loan easily when needed.
Calculation of EMI and its formula
You don’t really need to calculate EMI manually as there are many EMI calculators online. we can go there and just enter data to get EMI amount. You need Interest rate value, Principal value amount(The amount you borrow) and time period of loan repayment. By entering these values in EMI or Equated Monthly Instalment calculator, you can easily get the value of EMI amount on your anticipated Loan amount.
The formula of EMI calculation is-
EMI = [(Principal amount) x (Interest rate per month) x (1+(Interest rate per month))^(number of monthly instalments)]/[(1+(Interest rate per month))^(Number of monthly instalments)-1]
EMI = [P x I x (1+R)^N]/[(1+I)^N-1]
I= Interest rate per month
N= Number of instalments required
The above-defined formula gives you the amount which needs to be paid equally every month as EMI so that your loan amount gets over at the end of the tenure of the loan or at end of loan repayment time period. (Assuming you don’t make any pre-payments during the duration of the loan period)
For example, let’s assume that-
The Loan amount is Rs.50, 00,000/-,
the Rate of interest is 12% and
Tenure of the loan is 25 years.
So, P = Rs.50,00,000/-
R = Rate of interest per month
= (Annual Interest) /12
11% / 12
= (11/100) / 12.
N = 300 months (In the formula N is number of months. So 25 years mean 300 months)
Applying the above formula, EMI will come to Rs.52,661/-
Difference between Hire Purchase and Instalment Payment
|Hire Pruchase||Installment System|
|1.Nature of Hiring||1.Nature of selling|
|2.Seller is owner of goods||2.Buyer is owner of good|
|3.Seller can Re-sale good on insolvency of buyer||3.Seller cannot Re-sale good on insolvency of buyer|
|4.Regular payment of good by buyer||4.No need of regular payments|
|5. The seller has to bear the loss. If the good is destroyed in the accident.||5. Buyer has to bear the loss. If the good is destroyed in an accident.|
|6. Seller will take possession of good on the insolvency of Buyer||6. Official Receiver of the court will take possession of good on the insolvency of Buyer|
Q&A on EMI
Q1. What is the full form of EMI?
Ans:- EMI Full Form is Equated Monthly Instalment.
Hence you can see, that EMI Full Form, how EMI or Equated Monthly Instalment works. You can pay EMI using either pre-dated checks or by enabling automatically amount deducted option from the bank account.
Written by-Aditya Soni