Written By- Jaya Pathak
EMI stands for equated monthly installment. EMI financing is basically a financial agreement in which a buyer has to pay for any product or service which he is willing to take in the form of equal monthly installments rather than paying the entire amount up front. It can be called as a short-term loan amount which a user takes for a purchase of any product or service. The buyer has to repay the loan amount over a fixed period of time with or without interest as it depends upon the type of financing.
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 has 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.
Understanding the working of EMI financing
First of all, you have to choose a product or service which is eligible for equated monthly installments on the commercial platforms, retail stores and websites. At the time of billing, you have to select the payment option as equated monthly installments. Afterwards, you have to select the duration of the monthly installments as well as the finances such as banks or other financial institutions. Afterwards a minimal documentation such as PAN, Aadhar and KYC may be required. Some products and services may require an initial down payment which is completely optional. Afterwards, the user have to pay monthly as per schedule either manually or auto debit.
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 than 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.
What are the types of EMI financing?
- Credit card EMI: Most of the bank nowadays offer the service to convert larger transaction into equated monthly installments which can be achieved directly through your credit card. It is quite quick and requires less documentation for the EMI conversion. For the eligible customers, it is available instantly.
- Debit card EMI: This type of EMI financing is offered by selected banks such as HDFC, ICICI and Axis Bank to those customers who have a clean transaction record. It requires approval as well as sufficient account balance. Though it’s work is quite similar to a credit card EMI but it is linked to the saving account of the user.
- Consumer Durable Loans: It is offered by financial institutions such as Bajaj finserv, data capital and home credit. It is quite popular as well as available at the electronics as well as appliances store as it offers Zero down payment with no cost EMI option.
- Buy Now Pay Later: This is a new variety of EMI financing which is used basically for online shopping such as Amazon pay later and such. You can pay for the products later on within 15 to 45 days and then convert it into monthly installments.
How EMI financing makes shopping easier?
- EMI financing improves affordability as it breaks down larger expenses into smaller ones which is more manageable. Paying the entire amount up front might be difficult for individual and it might disrupt the monthly budget as well. Such huge amount is divided into equal installments of a certain amount which becomes easier for the user to accommodate within the monthly income. Affordability of EMI financing allows the consumers to purchase higher end products which are better in quality.
- EMI financing allows its users to make payment without any financial strain into your emergency funds or even your savings. You are not required to use your reserves in order to fulfil an urgent need. An EMI financing can help you to maintain emergency finance and help you to ensure that you are prepared to tackle emergencies.
- EMI financing doesn’t charge its user any additional interest. It offers no cost EMI which attracts more consumers. The users have only to pay their original price which is divided over the chosen EMI duration.
- EMI financing is approved with such an ease. With the help of automated system and API integration with credit bureaus, the process has become quite instant as well as easy. The seamless experience also involves the easiness of approval process where customers do not have to visit a bank in physical.
- EMI financing is not limited to electronics or furniture rather it contains every single category deriving from fashion to travel and health care. It has provided ease and convenience to its customers.
- By paying your EMI on time, your credit score is also enhanced which in future can help you to get the approval of your loan amount quite easily at a lower rate of interest.
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