Written By- Jaya Pathak
Equated Monthly Installments are quite crucial if you are thinking to avail any retail loans offered by financial institutions. It is a monthly sum of principal amount plus the interest rate which is to be repaid along with the loan over a period of time. It covers initial loan amount called principal and the interest which one has to pay to the lender.
When you are planning to take the loan then you need to pay the money back along with the interest amount. This amount is split into smaller amount which can be paid at regular interval of time. This is what we call equated monthly instalment which means equal, that is, which you have to pay every month.
Reserve Bank of India in its guidelines emphasize transparency. “All charges related to EMI based lending must be disclosed upfront.”
What is an easy EMI?
Easy EMI is one that is used to describe those equated monthly instalment schemes which are quite convenient, low cost and available for a wider range of product and services.
Understanding the difference Between regular EMI and no cost EMI
Regular EMIs are the one which allow the borrower to purchase a high value product by making small down payment. The lender can pay the remaining amount to the retailer which you can pay to the retailer over a period of time with fixed interest rate. On the other hand, no cost EMI is an easy and excellent alternative to the traditional financing option. The borrower can repay the amount over a specific time without paying any interest rate. Though processing fee maybe charged which you have to pay.
What is the significance of equated monthly installment?
Equated Monthly Installment is designed to ensure a structured and manageable approach to repay the loan over a period of time period. It is broken down into smaller amount but you have to be consistent every month.
Equated Monthly Instalment is made-up of two primary components:
- Principal amount: It is the initial loan amount which the borrower receives from the financial institution.
- interest amount: It is the amount which the borrower have to pay after receiving the fund.
How does it work?
Equated monthly installments are the fixed payment which the borrower has to pay to the lending institution. It is made-up of both principal as well as interest. The borrower has to pay equated monthly installments for a specific period of time. Over the period of time, the tenure of equated monthly installment allocated to the interest also decreases whereas principal amount increases.
What are the factors affecting EMI amount?
The number of equated monthly installments can increase or decrease as per the market rates, tenure and other factors. Some of the factors are listed below:
- Loan amount, interest rate and repayment tenure: If your loan amount will be higher then the rate of interest which will be charged by financial institution will also be higher. Therefore, your equated monthly installment payment will be higher. If your loan is of longer duration then smaller equated monthly installments will be charged to you but overall interest rate will be higher.
- Fixed and floating rate of interest on loans: In a fixed interest rate, the interest rate remains the same throughout the year. The equated monthly installment remains the same. On the contrary, floating rate of interest is that interest rate which changes over a period of time depending upon the market condition. The EMI can increase or decrease depending upon the current market condition.
- Prepayment: The prepayment of loans allow the borrower to lower the number of equated monthly installments. In the prepayment of loan, loans can be closed before the scheduled closing. You can pay the remaining loan amount but additional rates such as GST can be charged upon you.
- Down payment: If you are thinking to pay a larger down payment amount then it will significantly reduce the principal amount. It will result in lowering your equated monthly installments.
- Compound interest on loan: Financial institutions may charge compound interest on loans. In compound interest, the interest on the principal amount on loans is added to the previously interest. It is that interest which you have to pay on interest and your equated monthly installment amount can vary.
- Missed payment: If the borrower fails to pay the moment on time then the financial institution can charge additional interest rate over the period of time which may rise above the equator monthly installment amount.
Benefits of easy EMIs
- Easy EMI allows its consumer to afford high value goods and services without paying a huge sum of amount at once. Therefore, it makes the services affordable for its consumers.
- Easy EMI requires minimal paper work and is easily approved without any inconvenience.
- You can choose the duration as per your convenience based on your financial comfort. Hence, it provides you the flexibility.
- If you are able to repay the amount on time then it will show a good credit score. A good credit score can help you to get future loan approvals.
Precautions
- Always check the equated monthly plan if it is truly no cost or not.
- There are some banks which may charge one time processing fee which may add to the cost. Therefore, you must watch it out.
- If you are not able to close your equated monthly installments before the specified time period then you should also check if there is any penalties involved or not.
- Always try to pay the monthly amount some time to avoid any late fee or higher rate of interest which may negatively impact your credit score.
- Always compare different platforms and financial institution for better interest rate.
- You can use an EMI calculator which can help you to calculate the monthly outflows efficiently.
- Understand the terms and conditions about the interest rate, cancellation policies and processing fee.
Conclusion
An easy equated monthly instalment can help individual to manage the finals without any hustle bustle. But before using EMIs, you must analyse your income and other liabilities. You may compare different options and interest rates available on various institution. Understand all the charges and then take the required step.
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