EMI

An EMI is a fixed or scheduled monthly payment made by a borrower to a lender until a loan is repaid.

Each EMI generally contains two parts:

• Principal – repayment of the amount originally borrowed
• Interest – the cost charged by the lender for providing the loan

EMIs are commonly used for:

• Home loans
• Vehicle loans
• Personal loans
• Education loans
• Consumer durable loans
• Business loans

The EMI amount mainly depends on:

• Loan amount
• Interest rate
• Loan tenure

Generally:

• A higher loan amount increases the EMI
• A higher interest rate increases the EMI
• A longer tenure usually reduces the EMI but can increase total interest paid

In many loans, especially long-term home loans, the EMI may remain similar while its internal composition changes.

During the early part of the loan, a larger portion of the EMI generally goes toward interest.

Later, as the outstanding principal falls, more of the EMI goes toward principal repayment.

This changing split can be seen in the loan’s Amortization Schedule.

For floating-rate loans, changes in interest rates may result in a change in the EMI, loan tenure, or both, depending on the lender’s terms.

A low EMI should therefore not be judged alone. Borrowers should also check the total repayment amount and overall interest cost.

Lower EMI Can Mean More Interest

Rohan takes a home loan of ₹40 lakh.

The bank offers him two repayment options.

One has a shorter tenure with a higher EMI, while the other has a longer tenure with a lower EMI.

Rohan initially prefers the lower EMI because it is easier to manage every month.

However, he notices that the longer repayment period results in significantly more total interest over the life of the loan.

This shows why borrowers should compare not only the monthly EMI but also the loan tenure and total borrowing cost.