Introduction In the times that we live in, we have a lot more to buy than our previous generations. With the onset of globalization, there is a buzzword that has originated. The word is EMI. EMI full form is Equated Monthly Installments. It is also known as Equal Monthly Installment.
It is a fixed amount which is paid on a monthly basis to repay a loan which is taken by person or company . In a loan there are two parties involved. First is the lender, that is the one which provides a loan, for example – a bank or a financial institution. The second is the borrower (also known as the lendee), the one who is in need of money i.e. person or the company.
EMI is set according to the amount of loan between both the lender and the borrower. The amount is calculated by a formula depending upon :-
● The amount of loan
● The rate of interest (also known as ROI)
● The duration needed to pay the loan
More about EMI The EMI amount is finalised at the time of setting up the loan agreement between the two parties. Of all the things that get agreed upon and documented, the most important is the EMI which is to be paid on a specified date of every calendar month.
This has got two interesting aspects. From the lender standpoint, it provides the information regarding the time duration of obtaining the repayment. From the borrower standpoint, it provides the information about the money that the borrower has to put aside from monthly expenses every month as the EMI.
EMI consists of two components – the principal and the interest. With the payment of EMI every time the amount of principal as well as the interest reduces. The percentage of reduction depends upon the way EMI is calculated.
Other relevant facts Any discussion about EMI automatically includes discussion regarding the corresponding loan.
A loan is an amount which is taken from a bank or a financial institution. In most of the cases, the lending institution needs to have some safety to ensure that the money lent out does not become bad debt. For this, the borrower needs to mortgage something. Such loans are known as Secured Loans.
The secured loans are usually for a larger amount of money – of the order of hundreds of thousands. Those loans for which the financial institution does not need a mortgage, are known as Unsecured Loans. These are of lesser financial value mostly in order of thousands.
Calculation of EMI There are two formulas for calculating the EMI amount. These are FIXED INTEREST RATE and DIMINISHING BALANCE INTEREST RATE. Let’s understand about the two.
FIXED INTEREST RATE :-
In this method, the EMI is calculated on the entire loan amount (also known as the principal) without considering the fact that with each EMI the principal amount gets reduced. Examples of such a type of loan are car loan, home utilities loan, and so on.
DIMINISHING BALANCE INTEREST RATE:-
In this method, the EMI for the first month is calculated on the entire principal amount. For the subsequent months it is calculated on the remaining principal amount.
This is a cost-friendly option for borrowers since the repayment is spread out over a longer period of time. However, the cost-friendliness comes at a cost – the borrower remains indebted to the lender over a longer period of time.
Examples of such a type of loan are property loan, company loan ,etc.
What it means A lot of recent statistics show that the purchasing power of an average salaried individual has increased over the last 2 decades. A part of this can be attributed to the ease of availability of loans for lifestyle related purchases.
A part of this is also attributed to the larger number of lenders available in the market and every other lender trying to establish itself by providing attractive rate of interests and incentivising the borrowers to take loans
The message to readers With the change of times and with the spread of the internet, people are coming to know about various new things that improve the quality of life. This inherently means that taking loans has become an important aspect of maintaining social standards.
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EMIs are a convenient way to divide the expenses in such a way that an expensive thing does not appear expensive. However, there is a caveat – such ease of purchase often leads an individual into a trap.
This trap means that the liabilities outweigh the assets. In worse cases (with problems in income), people have often lost their mental peace and worst still, end up their lives in despair of not being able to repay the debt.
As they say “too much of anything is bad”, it boils down to the individual’s wisdom how to opt for EMIs in such a way that things are amicable and do not go beyond control.