how an equated monthly installment emi works
emis differ from variable payment plans in which the borrower can pay higher amounts at his or her discretion in emi plans borrowers are usually only allowed one fixed payment amount each month the benefit of an emi for borrowers is that they know precisely how much money they will need to pay toward their loan each month which can make personal budgeting easier the benefit to lenders or investors the loan is sold to is that they can count on a steady predictable income stream from the loan interest the emi can be calculated using either the flat rate method or the reducing balance aks the reduce balance method the emi flat rate formula is calculated by adding together the principal loan amount and the interest on the principal and dividing the result by the number of periods multiplied by the number of months the emi reducing balance method is calculated using this formula examples of equated monthly installment emi to demonstrate how emi works let s walk through a calculation of it using both methods assume an individual takes out a mortgage to buy a new home the principal amount is 500 000 and the loan terms include an interest rate of 3 5 for 10 years using the flat rate method to calculate the emi the homeowner s monthly payments come out to 5 625 or 500 000 500 000 x 10 x 0 035 10 x 12 using the emi reducing balance method monthly payments would be approximately 4 944 29 or 500 000 0 0029 1 0 0029 120 1 0 0029 120 1 note that in the emi flat rate calculation the principal loan amount remains constant throughout the 10 year mortgage period this suggests that the emi reducing balance method may be a better option because the dwindling loan principal also shrinks the amount of interest due in the flat rate method each interest charge is calculated based on the original loan amount even though the loan balance outstanding is gradually being paid down the emi reducing balance method often works out to be more cost friendly to borrowers the flat rate method results in a higher effective interest rate equated monthly installment emi faqsin the finance world emi stands for equated monthly installment it refers to periodic payments made to settle an outstanding loan within a stipulated time frame as the name suggests these payments are the same amount each time there are two ways to calculate emi the flat rate method and the reducing balance or reduce balance method both take into account the loan principal the loan interest rate and the term of the loan in their calculations as soon as you purchase something on a credit card with an emi option that is doesn t demand payment in full each month your card s available credit limit is reduced by the total cost of the goods or service the emi on credit cards then works much like a home loan or a personal loan you pay back the principal and interest each month gradually reducing your debt over some time until you pay it off in full emi is deducted from a credit card using the reduce balance method emi is neither inherently good nor bad unless you consider borrowing and accruing debt bad and paying for things in full the only good option in terms of borrowing options emi does have its good points though because it divides the debt into the same fixed payments each month it helps borrowers budget their finances and keep in mind their outstanding obligations they know how much they have to pay and how long it will take them to settle their debt in full 