What is EMI and how it will be analyzed by loan application?

EMI Equated Monthly Installment is the amount you have to pay to your bank/lender on a fixed date, every month, for the entire tenure of your loan application period. The EMI is paid in the form of post-dated cheques for the duration of your loan and is in favor of the lender. The lender could be a bank, NBFC, or credit card Company, and the loan could be for any purpose – housing, auto or personal loan/credit card loan.

EMI consists of payment towards the principal (actual amount borrowed) and the interest on that amount for the entire loan period. In the early years, a higher proportion of the EMI is formed by the interest payment. As the loan matures, the interest component decreases and the principal amount forms a higher percentage of the monthly payment.

If it is affordable for you have the option of prepaying part of your loan at the time of loan application, it is better to do it in the early months/years of the tenure so that your principal decreases, thereby saving you interest on later payments.

What does the EMI amount consist of?

Each EMI consists of payment towards the principal (actual amount borrowed) and the interest on that amount for the entire loan period. In the early years, a higher proportion of the EMI is formed by the interest payment. As the loan matures, the interest component decreases and the principal amount forms a higher percentage of the monthly payment.

Suggestion- If the option of prepaying part of your loan application is affordable to you then it is better to do it in the early months/years of the tenure so that your principal decreases, thereby saving you interest on later payments.

How EMI will be analyzed by your loan?

Rajesh Sharma, 23, employee in private firm bought a car in 2015 worth Rs 5.95 lakh. He made a down payment of Rs. 1.5 lakh and took auto loan for the rest of the amount at 12% interest for 4 years. Now he paying an EMI of Rs. 11,700 per month. Thus, there will be still a confusion knowing if the amount is correct or not.

Like Rajesh, there are many people who are confused if their lender is charging them a fair amount as EMI. On should know how to calculate EMI so that he/she can cross-check that with what you have been paying per month.

The monthly EMI payment depends on 3 factors

  1. The loan amount(principal)
  2. The interest rate you have borrowed at (this could be fixed or variable)
  3. The tenure (length of the loan.)

Lenders use a standard formula for calculating EMI. Finbucket can help you evaluate the EMIs for various loan applocation options.

To get to the EMI you basically need to calculate the amount borrowed, the interest that you will have to pay on the amount and the amount that you will pay as the processing fee for said loan.

Once have all this information, you will have to sit down with a pen and paper to see how much the monthly payment will be for your chosen loan application tenure. Once that is done, you may realize that the EMI is too big and you need to reduce it somehow. To do this you will either have to adjust either the loan tenure or the amount that you wish to borrow and do the calculations all over again.

Here are some ways in which you can reduce your EMI payments:

  • Higher down payment- When your loan application is sanctioned, choose to make a large down payment so that the principal amount is reduced. Your interest payment is calculated on the principal, so the smaller the principal, the lower the interest payment and smaller EMI.
  • Opt for a longer tenure- If you have a long loan period, your EMI reduces proportionately as your principal and interest is divided over a greater number of months. Fortunately, your monthly burden might be smaller, you might end up paying more over the entire duration of the loan.
  • Making an early prepayment– The majority of your tenure is to make an early pre-payment. If the option of prepaying part of your loan application is affordable to you, it is better to do it in the early months/years of the tenure so that you will be able to reduce your principal, thereby saving you interest on later payments.
  • Negotiate with the bank- If you are in good standing with your lender and have been disciplined about making your repayments on time, then you could ask your lender for a reduction in the interest rate.
  • Transfer your loan to another lender- If you find a lender who offers better terms and conditions on your loan, it might be a good option to change your lender.

 

 

By | 2018-01-09T06:10:43+00:00 November 18th, 2017|Loans|0 Comments

About the Author:

Pulkit Jain is the founder of LegalRaasta – India's top portal for registration, trademark, return filing and loans. Pulkit is a veteran CA with over 10+ of experience.

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