- What is an EMI?
EMI stands for Equated Monthly Instalment for the loan you avail from your bank. The EMI consists of the principal portion of the loan amount and the interest. Therefore, EMI = principal amount + interest paid on the loan. The EMI,
usually, remains fixed for the entire tenure of your loan, and it is to be repaid over the tenure of the loan on a monthly basis.
- How is EMI calculated?
Mathematically, EMI is calculated as under:
P x R x (1+R)^N / [(1+R)^N-1]
P = Principal amount of the loan
R = Rate of interest
N = Number of monthly instalments.
The aforesaid variables along with the processing fee are needed to determine your EMI.
For example, if you borrow Rs 51,00,000 for a home loan from Axis Bank at a rate of interest of 10% p.a. and the tenure of the loan is 15 years, your EMI will be calculated as under (assuming a 1% processing fee):
EMI = 5100000* 0.0083 * (1+ 0.0083)^180 = Rs 54,805 / [(1+ 0.0083)^180 ]-1
The rate of interest (R) on your loan is calculated monthly i.e. (R= Annual rate of interest/12/100). For instance, if R = 10% per annum, then R= 10/12/100 = 0.0083.
Finding it complicated? Don’t worry! Use Axis Bank’s Home Loan calculator. It is an automatic tool that makes loan planning easier
for you. Here are the five benefits of using the EMI calculator:
- Easy to access
- Saves time and energy instead of performing manual calculations
- Provides quick results
- Helps you ascertain if the monthly EMI is affordable or not
- Aids you in financial planning
Do note that during the initial years of your loan tenure, you pay more towards interest, and gradually, as you repay the loan, a higher portion is adjusted towards the principal component (see table below). This is because; EMIs are
computed on a reducing balance method, which works in your favour as a borrower.
Remember, the interest rate and your loan tenure are the vital deciding factors for your loan EMI. Higher the interest rate on the loan, higher will be your EMI and vice-versa. Similarly, a shorter loan tenure increases your EMI and
Axis Bank offers the best interest rate across categories of loans.
- When will my EMI be due and how is it to be paid?
Your EMIs are due on a fixed date every month, which is notified when the loan is disbursed.
Today to repay your loan, NACH mandate makes repayment almost automatic your EMIs directly get debited from your bank account. However, for security purposes, a set of post-dated EMI cheques are required.
- What happens in the case where the interest rate reduces or increases during the tenure of your loan?
If your loan is a floating rate loan and the interest rate reduces during the tenure of your loan, a higher amount is adjusted towards the principal component and the loan gets repaid sooner.
On the other hand when the interest rate increases, the reverse happens i.e. a greater portion is adjusted towards the interest component than the principal, whereby this could slightly change in loan tenure assuming the EMI is kept
- What happens when you partially prepay the loan?
When you partially prepay the loan during the loan tenure and decide not to change your future EMIs, the original loan tenure would reduce, i.e. you repay your loan sooner.
However, if you decide to reduce your future EMIs since you partially prepay, your loan tenure remains unchanged.
- What happens if you skip your EMI?
If you skip EMIs, say due to insufficient balance or any other reason, assuming EMIs remaining the same, the tenure of the loan would increase.
Remember, skipping EMIs does not reflect well on your creditworthiness and could impact your credit score. Hence, make sure you borrow wisely, within your means, in the interest of your financial wellbeing.