An Equated Monthly Installment (EMI) is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. EMI depends upon the tenure for which a loan is taken. EMI is high for a tenure of short period of time as compared to long period.
Equated monthly Installments are used to pay off both interest and Principal each month so that over a specified number of years, the loan is paid off in full. If a person pays only the interest component each month, then it is not the EMI amount as the Principal amount stands unpaid.
Want to understand using a hypothetical situation?
A person was planning to buy a new motorcycle and has managed to save Rupees 75,000 for the cause and decides to take a loan for the balance amount. He approached a showroom and decides to buy a latest motorcycle worth Rupees 2,50,000. He visits a bank on the next day and was able to fetch a motor loan of Rupees 1,50,000 only. He agreed to pay back the amount with an interest of 12% within a tenure of 3 years. He worked overtime and was able to manage the balance of rupees 25,000 rupees.
The person on taking a loan of Rupees 1,50,000 has to pay a sum of Rupees 1,79,357 including an interest of Rupees 29,357 i.e. 16.4% of total payable amount within a tenure of 3 years at an interest rate of 12% Per Annum
In first year, he needs to clear a debt of 29.44% of total debt of rupees 1,79,357 i.e. 59,786 including a Principal Amount of Rupees 44,162 and an Interest of Rupees 15,623
In Second year, he needs to pays rupees 59,786 clearing 62.62% of the total debt including a Principal Amount of Rupees 49,763 and an Interest of Rupees 10,023
In third year he needs to make a final installment of rupees 59,786 to clear all his debts. The installment includes a Principal Amount of Rupees 56,074 and an Interest of Rupees 3,711.