EMI (Equated Monthly Installment)
A fixed payment amount made by a borrower to a lender at a specified date each month, consisting of both principal and interest components.
EMI stands for Equated Monthly Installment. It is the fixed amount you pay to the bank or financial institution every month until your loan is fully repaid.
Each EMI payment consists of two components: 1. Principal Component: The portion that goes towards repaying the actual loan amount 2. Interest Component: The portion that goes towards the interest charged by the lender
In the early years of a loan, a larger portion of your EMI goes towards interest. As you continue making payments, the principal component increases while the interest component decreases. This is because interest is calculated on the outstanding principal balance.
Factors affecting EMI
- Loan amount (higher loan = higher EMI)
- Interest rate (higher rate = higher EMI)
- Loan tenure (longer tenure = lower EMI but more total interest)
EMI Formula: EMI = P × r × (1 + r)^n / ((1 + r)^n - 1)
Where
- P = Principal loan amount
- r = Monthly interest rate (annual rate / 12)
- n = Loan tenure in months
Examples
For a ₹50 lakh loan at 8.5% for 20 years, the EMI would be approximately ₹43,391
A 1% increase in interest rate can increase your EMI by ₹3,000-5,000 per lakh