What is an EMI and how does it work?

EMI stands for "Equated Monthly Installment." It is a fixed amount that borrowers pay to lenders at regular intervals, typically on a monthly basis, to repay a loan over a specified period. EMIs are commonly used for various types of loans, such as home loans, car loans, personal loans, and more. Here's how EMI works:

1. Loan Principal: When you take out a loan, you borrow a specific amount from the lender. This is called the loan principal.

2. Interest Rate: The lender charges interest on the outstanding loan amount. The interest rate is expressed as a percentage of the principal and is a crucial factor in determining your EMI amount.

3. Loan Tenure: You and the lender agree on the duration over which you will repay the loan. This is known as the loan tenure or loan term.

4. EMI Calculation: The EMI amount is calculated using a formula that takes into account the loan principal, interest rate, and loan tenure. The formula considers the interest component and the principal repayment component of each EMI.

5. Fixed Amount: Each EMI consists of both interest and principal repayment. While the interest component is higher at the beginning of the loan term and decreases over time, the principal repayment component increases with each EMI. However, the total EMI amount remains constant throughout the loan tenure.

6. Regular Payments: You are required to make the EMI payment to the lender on the specified due date each month. This regular payment continues until the loan is fully repaid.

7. Loan Repayment: Over time, as you continue to make EMI payments, the loan principal decreases. As the principal reduces, the interest component of the EMI also decreases, while the principal repayment component increases. This gradual reduction in both principal and interest continues until the loan is paid off.

8. Complete Repayment: Once you have paid all the EMIs as per the schedule, the loan is considered fully repaid, and you have no further financial obligation to the lender.

It's important to note that EMIs are a convenient way to manage loan repayments because they provide borrowers with a clear and predictable schedule of payments. Borrowers should carefully review the terms and conditions of their loan agreements, including the interest rate, loan tenure, and EMI amount, before committing to a loan to ensure they can comfortably manage the payments.