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What is the full form of EMI?

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EMI: Equated Monthly Installment

The full form of EMI is “Equated Monthly Installment“. It is a fixed payment amount that a borrower pays a lender on a specific date of each month for a specific period of time. The equivalent monthly installments (EMI) are used to pay off the interest and principal amount, during a specific tenure, so that the loan is completely fully paid off along with the interest. The interest rate is the rate of interest charged by the moneylender (e.g. Bank), where the principal amount is the amount borrowed and the tenure of the loan is the time granted by the lender to pay the entire loan, including interest.

EMI full form

Formula to calculate EMI

The formula for EMI (in arrears) is:

P\,=\,A\cdot {\frac {1-\left({1+r}\right)^{{-n}}}{r}}

or, equivalently,

A\,=\,P\cdot {\frac {r(1+r)^{n}}{(1+r)^{n}-1}}

where: P is the principal amount borrowed, A is the periodic amortization payment, r is the periodic interest rate divided by 100 (annual interest rate also divided by 12 in case of monthly installments), and n is the total number of payments (for a 30-year loan with monthly payments n = 30 × 12 = 360).

Benefit

The main benefit of EMI is that it offers the power to buy beyond its monetary reach, which allows it to pay in installments; there are no intermediaries; therefore, you pay the EMI directly to the creditor without the hassle of contacting an intermediary. EMIs differ from variable payment plans, in which the borrower can pay higher payment amounts, at his discretion. In EMI plans, borrowers only have a fixed payment amount per month.

Another advantage of an EMI for borrowers is that they know exactly how much money they will need to pay off their loans each month, which facilitates the personal budgeting process. If you plan to obtain a loan from a bank, you must understand how banks calculate the EMI to be able to evaluate various loan options from different banks and choose one according to your financial limitations.

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