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What is EMI? Definition of EMI and FAQs

01 Oct 2021 by Team FinFIRST
What is EMI - Definition of EMI and FAQs

EMIs are important, as they can help finance anything, from a smartphone to an entire apartment. Here is what you should know about them.

Despite its glaring benefits, many people still do not about the EMI payment method. It is rather surprising as EMIs have been around for years and are actively advocated by financial institutions. This article will help you grasp the comprehensive concept of EMIs.

What is an EMI?

An equated monthly instalment (EMI) is a set monthly payment provided by a borrower to a creditor on a set day, each month. EMIs apply to both interest and principal each month, and the loan is paid off in full over some years.

Now that we are clear about what the meaning of an EMI is, let us delve further into its workings.


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How does an EMI work?

We have learned the meaning of an EMI, but let us now learn how it works. Flexible payment arrangements, in which the borrower might pay higher sums of his or her choosing, are not the same as EMIs. Borrowers on EMI programmes are usually only allowed to make one set payment per month. Borrowers profit from an EMI since they know exactly how much money they will have to pay towards their loan each month, making personal financial planning easier. Lenders benefit from the loan interest, as it provides a consistent and predictable stream of income.

How is EMI calculated?

There are two ways in which EMI can be calculated. These methods are:

The flat rate method

When the loan amount is progressively being repaid, each interest charge is computed using the original principal amount in the flat rate method. The EMI is determined by adding the whole loan principal and total interest to the principal, then dividing the total by the number of EMI instalments, which is the time in the loan term. The flat rate strategy is popular on personal loans and auto loans. Borrowers benefit less since interest payments must cover the entire principal amount, resulting in a higher effective interest rate than the reducing-balance strategy.

The borrower makes regular periodic repayments to the lender for many years with the purpose of retiring the loan. EMIs are especially helpful in loans, such as real estate mortgages, vehicle loans, and student loans.


The reducing balance method

The reducing balance technique, compared to the flat rate method, determines the interest payment according to the outstanding principal. It means that each EMI’s interest and principal payments components alters. Interest payments make up a larger component of the EMI at the beginning of the loan term, as a proportion of the outstanding loan. The interest amount decreases as the loan is repaid over time, and a larger proportion of the payments go toward principal repayments. The reducing-balance strategy is often employed on home mortgages, credit cards, and overdraft services.

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What does EMI mean?

EMI stands for equated monthly instalment. It relates to payments made regularly to repay an outstanding loan within a certain time frame. As the name implies, these instalments are always of the same amount.

How is EMI deducted for a credit card?

When you buy something on a credit card with an EMI option (that is, one that does not need payment in full each month), the complete amount is deducted from your card's current credit limit. The EMI on credit cards works similarly to a home loan or a personal loan. You must pay back the principal and interest each month, progressively reducing your debt over time until it is paid off in whole. The reducing balance approach is used to deduct EMI from a credit card.

Are EMIs bad?

EMI is neither good nor bad, although it does have some advantages. It assists borrowers in budgeting their finances and remembering their outstanding responsibilities because it classifies the debt into fixed monthly payments. They recognise how much they owe and how long it will take them to pay it off completely. The key here is to get financing from the right institutions.

If you need to avail of an EMI facility, turn to a trustworthy banking facility such as IDFC FIRST Bank. We offer competitive rates and easy payback options. If you are paying a high rate of interest from your existing facility, you can take out a personal loan from IDFC FIRST Bank and repay the amount in whole. You can then repay your loan with easy instalments[SI1] . Check our EMI policies page to see for yourself.

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The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.