Umesh Kurmi is a semi-qualified Chartered Accountant from the Institute of Chartered Accountants of Nepal with seven years of experience.
EMI Full-Form & Its Meaning In Banking
EMIs are significant because they may be used to finance anything from a smartphone to an entire apartment.
Despite its obvious advantages, many consumers are unaware of the EMI payment plan. It's unexpected given that EMIs have been around for a long time and are actively promoted by financial institutions. This essay will assist you in comprehending the complete notion of EMIs.
EMI is an abbreviation for Equated Monthly Installment. It is a predetermined amount of money that a borrower pays to a moneylender. It becomes payable on a certain day each month for a set period. The EMI comprises a principal and interest. The sum of these two is paid to the bank over a specified number of years to completely pay off the credit. As a result, the principal and interest charges are pushed in opposite directions. If you aim to apply for a bank line of credit, you should comprehend how banks calculate the EMI so you may compare different advanced alternatives from various banks and pick the ideal one for your financial condition.
Factors Affecting EMI
1. Marginal Cost of Funds
The Marginal Cost of Funds Based Lending Rate is abbreviated as MCLR. This is the most minimal funding cost that a bank might offer. Operating expenses, the marginal cost of funds, the Cash Reserve Ratio (CRR), any bad convey, and the tenor premium may influence it. The MCLR has an annual reset date when banks examine the rate for existing home loan borrowers. Even if the MCLR changes between the reset date and the next year's reset date, the MCLR on the reset date stays relevant until the next year's reset date. This means that your financing costs may climb or fall when the MCLR rate changes.
2. Type of Interest
You can select a fixed rate, a floating rate, or a hybrid financing cost. Floating loan rates fluctuate in response to Reserve Bank of India movements. If the latest RBI guidelines result in lower interest rates, your EMIs will be cheaper as well, and vice versa. With a fixed financing rate, you pay the same amount of interest throughout your loan. Loans with fixed interest rates begin with a fixed interest rate for a set length of time before switching to a floating interest rate.
3. Loan-to-Fair Value (LTFV) Ratio
LTFV is the most extreme measure of property assessment that can be covered by credit. A larger advance sum attracts a higher interest rate since it represents a higher credit risk. Putting down a bigger down payment can assist reduce the loan amount, which in turn lowers the interest rate.
4. Credit Score
This normally has an impact on your financing costs. Your credit score reflects your repayment history, financial discipline or habits, and creditworthiness. A low credit score suggests that you are a high credit risk. It instructs lenders to charge a higher interest rate to compensate for their risks. A higher credit score, on the other hand, indicates a reduced credit-risk individual, making lenders more inclined to provide lower interest rates.
5. Valuation of the Property
The financing cost you are charged will be affected by the worth of the property you are thinking about buying. Homes in a favorable location with strong facilities and connectivity, for example, will have a greater resale value. Homes in less desirable neighborhoods may be less expensive, but they will have a lower resale value. Similarly, newer properties are regarded as more valuable, but older properties are regarded as having lesser resale value. Lenders consider homes with a high resale value to be a profitable investment and hence charge lower borrowing rates on them. Interest rates will be higher for residences with a lower resale value.
6. Income Sensitivity
Individuals with a steady source of money are regarded as low-risk, whilst those with an inconsistent source of income are deemed high-risk. Lower interest rates are thus offered to those with a stable income, such as salaried professionals, PSU and government employees, and staff of significant private sector enterprises. Among the self-employed, doctors and chartered accountants are considered low-risk.
7. Loan Term:
Credits with shorter terms have lower financing costs (regardless of whether the EMIs are higher) than advances with longer terms (which will have lower EMIs yet a higher loan fee). It is simple to calculate the appropriate tenure for your loan using a simple online home loan EMI calculator.
The elements referenced above are the most significant in deciding the funding cost of your home credit. A portion of these is influenced quite a bit by, while others are affected by the economy. Considering these considerations while selecting a loan might help you acquire the best loan for your financial situation and demands.
EMI Calculation Formula
Every bank has EMI calculators to compute the EMI, but if you want to conduct a manual calculation, use the following formula:
EMI = P x R x (1+R)^n/((1+R)^n-1)
Using the above-mentioned manual formula, you can compute the EMI manually. You must enter the data in their proper locations and begin the calculations.
P = Principal amount of the loan
R = Rate of interest
n = Term of the loan
How is EMI Calculated? (Alternate Method)
If you don’t want to use the formula, to arrive at EMI you need the following:
-Principal amount of the loan,
-Interest rate, and
There are two methods:
The interest rate on Flat Amounts:
The interest is computed on the entire principal loan without taking into account the fact that the main amount is lowered with each EMI.
Principal amount: 3,000,000
Flat rate of interest: 12%
Total duration: 3 years
EMI = (Principal + 3 year interest)/36 months
= (3,000,000 + 3,000,000*3*12%)/36
Short-term loans, such as car and motorcycle loans, often carry a fixed interest rate.
The interest rate on decreasing balances:
Interest is calculated on the whole principal loan for the first month and the outstanding loan amount for subsequent months. The interest rate and amount vary each month. The following formula or approach is used to compute the lowering interest amount:
Principal Loan Amount= 3,000,000
Diminishing rate of Interest=12%
Duration: 3 year
Interest for first month = loan amount (3,000, 000)*(1/12*)*(12/100) =30,000
Interest for second month= (outstanding loan amount)*(1/12)*(12/100)
Similarly, interests for succeeding months are calculated.
How is EMI deducted from a credit card?
When you use a credit card with an EMI option (one that does not need payment in full each month), the complete cost of the products or service is deducted from your card's available credit limit. The EMI on credit cards thus functions similarly to a home loan or a personal loan: You repay the principal and interest each month. This progressively reduces your debt over time until you have paid it off completely. The reduce-balance approach is used to deduct EMI from a credit card.
Is EMI good or bad?
EMI is neither good nor bad in terms of itself—unless you consider borrowing and accruing debt to be evil, and paying for goods in full to be the sole "good" alternative. However, in terms of financing possibilities, EMI has some advantages. It assists borrowers in budgeting their finances and keeping track of their outstanding responsibilities because it divides the debt into the same fixed installments each month. They know the sum they need to pay and how long it will take to release their commitment completely.
Advantages of EMI
It permits you to procure items that are out of your monetary reach by permitting you to pay in portions.
You can evaluate different EMI choices offered by different banks and pick how much you want to pay in installments as well as the loan tenure based on your financial situation.
You pay the EMI directly to the lender, eliminating the need to deal with an intermediary.
It has no negative impact on your funds because you are compelled to make minimal recurring installments rather than a big sum payment.
Disadvantages of EMI
EMI is a long-term obligation. Installments should be made until the obligation is paid off.
When you choose an EMI program, banking institutions may charge you a processing fee in addition to the interest cost. Missing an EMI or falling behind on payments can have serious consequences for a consumer. In the instance of a home loan or a car loan, your lender has the legal right to repossess the mortgaged item if you consistently fail to make payments.
Assume you wish to purchase a smartphone today for Rs. 75,000. Assuming you pick EMIs, you will wind up paying more than the expense of the credit at the finish of the repayment time frame. The excess is the interest charged by the institution for the utilization of its loans. To avoid paying more than your initial purchase price, consider a zero-interest EMI plan.
Several institutions do not allow prepayment, and even if they do, there are significant fines that must be paid for prepayment.
Deciding to pay your bills with equated monthly installments is one of the most important steps you can take toward improving your credit.
In most cases, it’s best to pay your mortgage using equated monthly installments. This way, your mortgage company will automatically withdraw the correct amount from your bank account each month, so you don’t have to worry about making extra payments or missing a payment. You can use the money in the account for other things. It's also more profitable than paying a series of discrete contract installments, particularly if you have a limited amount of cash on hand.
What does EMI mean in simple terms?
An equated monthly installment (EMI) is a fixed monthly payment made by a borrower to a creditor on a predetermined day each month. The borrower repays the principal and interest each month. This progressively reduces your debt over time until you have paid it off completely.
What is EMI per month?
EMI, which stands for equated monthly installment, is the monthly payment we make on a loan that we chose. EMI payments include both principal and interest payments on the loan amount. In the beginning phases, the interest portion represents most of the EMI.
Is EMI the same as a loan?
EMI and loan are two different things. EMI includes both the interest and the principal. A loan represents an obligation without interest.
What is running loan EMI?
A running loan equated monthly installment (EMI) is a fixed payment amount given to a lender on a specific date each calendar month by a borrower. Equated monthly installments are applied to both interest and principal each month until the loan is paid off in full over a stipulated period of years.
What is a CIBIL score?
The CIBIL Score, which varies from 300 to 900, is a three-digit numerical summary of your credit history, rating, and report. The closer your credit score is near 900, the better your credit score.
What is a down payment in EMI?
Down Payment is a payment option offered on select products that allows you to pay 25% of the product price at the time of purchase and convert the remainder into EMI on your credit card. The Down Payment and the first EMI installment must be paid in the next billing cycle of your credit card.
What are the types of EMI?
A borrower can select between two types of EMI payments: EMI in Advance and EMI in Arrears. Unsecured and secured loans, such as personal loans and vehicle loans, are repaid to the lender in Equated Monthly Installments (EMIs) over a set length of time known as the loan tenure.
Can I pay EMI after the due date?
If you pay your EMI late, your lender may levy additional fees. If you make an EMI payment after the due date but within your lender's grace period, you will normally be charged a 'late fee' in addition to your EMI amount.
Can I pay more than EMI?
Yes, you have the option of paying extra than the normal EMI. The surplus amount will not only lower your outstanding principal but will also minimize your interest burden. Every year, you can pay one additional EMI (in addition to the standard amount of EMIs). This is a decent way to reduce the term of your advance thus bringing down your loan cost.
Can we pay all EMI at once?
Whether you have a personal loan, a home loan, a car loan, or another type of loan, the bank allows you to clear the remaining EMIs all at once. Repaying the remaining EMIs all at once is a terrific strategy to get out of debt and improve your credit score. However, be wary of the prepayment penalty.
What happens if I miss one EMI?
The most visible effect of missing loan payments is a drop in your credit score. To be eligible to apply for a loan, most lending institutions require borrowers to have a CIBIL score of 750 or higher. Missing even one EMI payment might reduce a borrower's credit score by 50 to 70 points.
Furthermore, failure to pay EMIs on time incurs additional interest at the rate of 2% per month, increasing the total amount owed.
Can I buy jewelry on EMI?
You don't have to be concerned because you may buy any gold jewelry you like online and pay for it in Equated Monthly Installments (EMI). In this manner, you can pay a set amount of money every month for a set period.
Can I convert jewelry transactions to EMI?
Customers are usually given the option of converting their debts into EMIs when they make a purchase worth more than Rs 10,000.
Can I take gold on EMI?
You may buy gold on EMI using merely a credit card. Please keep in mind that gold on EMI can only be processed if you pay with an Indian credit card. The Gold Jewellery on EMI does not apply to any other payment method, including cash, check, debit card, internet banking, Paytm, PayPal, and so on.
What is the processing fee in EMI?
In the case of regular EMIs, the seller charges you a processing fee ranging from 0.5 percent to 3 percent, as well as an interest rate ranging from 8% to 15%.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2022 Umesh Kurmi