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HomeInsights & AdviceEverything you need to know about equated monthly installments

Everything you need to know about equated monthly installments

by John Saunders
20th Aug 20 10:35 am

Equated monthly installment, or EMI, is the fixed payment a borrower pays to the lender on a specified date. EMI’s offer borrowers peace of mind by giving them the advantage of knowing how much they need to pay each month until their debt gets fully paid.

Equated monthly installments are common in almost all types of loans available. Borrowers are more confident and secure in this type of payment scheme compared to payday loans. Payday loans require the borrower to pay the loan in full, including the principal amount and the interest rate on the next scheduled payday.

Loans that offers equated monthly installment payment

Before learning about all loan options that offer EMI payment plans, you might be wondering: what is an installment loan? An installment loan is a general term used for both personal and commercial loans offered to the borrowers. Here are the loan options that offer an equated monthly installments to their borrowers.

Personal loan

Personal loans are loans you take out for personal reasons, such as vacation funds, unexpected medical bills, or purchasing personal needs. When you acquire a personal loan, you will have to pay both the principal amount and interest rate on an installment basis until fully paid.

Most personal loans are unsecured, which means that they are not backed by collateral. The loan term usually lasts from two to five years. You can get the best personal loan offer if you have a good credit score and a good reason behind your loan application.

Car loan

Another installment loan available is a car loan, which is also referred to as an automobile loan, or auto loan. A car loan is what people apply for when they need to purchase a car but do not have the full amount of money to pay for it.

Home loan

A home loan or a mortgage loan is a loan option offered by banks and other lenders for individuals who want to purchase a residence. Like the car loan, a person who wants to purchase a home can apply for a home loan to aid them with the purchase.

How to calculate EMI

There are two ways to calculate EMI. You can calculate it in a flat interest rate or reduce the balance interest rate. Written below is the method used on calculating your EMI for both interest rates given.

Flat interest rate

Under the flat interest rate, you can calculate the interest on the initial loan amount you acquired and is applicable throughout the loan term. This gives the same interest rate every month. The flat interest rate is usually applied on a car loan.

The formula you can use in calculating your flat interest rate EMI is:

EMI = [Principal + Interest] / Period in Months

Reducing balance interest rate

The second method of calculating your EMI is by reducing the balance interest rate. In this method, the interest is calculated on the outstanding balance of the initial loan amount availed by the borrower. Therefore, the interest varies for different months.

The formula you can use to calculate a reducing balance interest rate is as follows:

EMI = [Principal x Interest Rate x (1+Interest)^Loan Term Duration] / [{(1+Interest)^Loan Term Duration}-1]

How to manage EMI

Knowing how to manage EMIs will ensure you that you are in control of your payments. Managing EMI is a skill, and you need to master this skill for your advantage. The main goal of EMI management is to repay your loan without feeling financial pressure. Here are some tips that can guide you in managing your EMI properly.

Think before you borrow

Think twice (or thrice) before you borrow money. You have to evaluate your situation and ask yourself if you need to acquire a loan. Getting one in order to purchase appliances, gadgets, or furniture is not ideal. Moreover, stay away from loans that do not create tangible assets except for an educational loan.

Apply for a shorter loan term

A shorter loan term means less interest rate to pay. If your finances allow you to pay your loan in the short term, you have to choose a short term loan payment scheme. Some banks or lenders permit advance EMI payments from their borrowers. If you happen to have a few extra bucks, you can use your EMI in advance to shorten the length of your loan term.

Maintain an excellent credit score

You can get a better loan deal if you have a good credit score. Lenders can offer you loans with a low-interest rate if they see your creditworthiness. A low credit score often means a borrower is unlikely to pay, which is why lenders impose a higher interest rate on their loan.

Research and compare

Take advantage of the internet and make a thorough research of all banks and lenders in your area. Compare the loans offered by different lenders and choose what best fits your needs and capability. Knowing what loan works for your situation will make you more prepared in managing your EMI.

Never delay, never miss

Delayed and missed payments are often results of acquiring a loan that does not fit you. This is the best example of why you should conduct research and compare loan offers before applying.

Delayed and missed payments are the biggest mistake you can commit while managing your EMI, as it will only add extra charges for you. If you are delayed or missed a payment, the lender will charge you penalties, and your credit score will be negatively affected at the same time.

Takeaway

As we already know, the EMI is the most common loan agreement for almost all loan types. You should be familiar with it to understand its concept better. Knowing everything about EMI will give you a heads up on what to expect when you acquire a loan that offers this type of payment scheme.

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