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<span><a href="index.php">Home</a> > <a href="Contents_Articles.php">Articles Menu</a> > <a href="Loan-Articles.php">Other Articles</a> > EMI - Smart way to MANAGE your Debt</span>
<div id="txt"><h1>EMI - Smart way to MANAGE your Debt</h1>
<p> EMI is the most common acronym in the world of borrowing today. EMI stands
for Equated Monthly Installment. This is the amount paid every month as
long as the
<a href="http://www.deal4loans.com/">loan</a> amount is outstanding, which goes towards both the interest
& principal repayment. Though, EMI is the unequal combination of principal
and interest repayment, overall it remains constant throughout. Looks simple,
but the calculation of EMI greatly differs in the industry. <br>
Initially, a major part of the EMI goes in paying the interest only. As
the tenure approaches the end, the principal repayment component increases.<br>
<b class="heading2h">Factors effecting EMI</b><br>
• Rate of interest<br>
• Loan Amount<br>
• Loan tenor<br>
Amount of EMI is inversely proportional to the tenor of the loan, assuming
the loan amount to be the same. For instance, EMI for a
<a href="http://www.deal4loans.com/personal-loans.php">personal loan</a> of
Rs.2, 00,000 at 20% interest rate will be like this: <br>
<br>
<table width="510" border="0">
<tr><td width="152" ><table width="126" height="26" border="0">
<tr>
<td width="101" align="center">Increase in Tenor</td>
<td width="8"><img src="images/arrow-down.gif"></td>
</tr></table></td><td width="342" align="center">
<table width="100%" border="1" cellspacing="0" cellpadding="5">
<tr>
<td width="47%"><div align="center"><b>TENOR</b></div></td>
<td width="53%"><div align="center"><b>EMI</b></div></td>
</tr>
<tr>
<td><div align="center">1 year</div></td>
<td><div align="center">Rs.18526</div></td>
</tr>
<tr>
<td height="20">
<div align="center">2 years</div></td>
<td><div align="center">Rs.10179</div></td>
</tr>
<tr>
<td><div align="center">3 years</div></td>
<td><div align="center">Rs.7432</div></td>
</tr>
<tr>
<td><div align="center">4 years</div></td>
<td><div align="center">Rs.6086</div></td>
</tr>
<tr>
<td><div align="center">5 years</div></td>
<td><div align="center">Rs.5298</div></td>
</tr>
</table>
</td><td> </td><td width="152" >
<table width="126" height="26" border="0">
<tr>
<td width="8"><img src="images/arrow-up.gif"></td>
<td width="101" align="center">Increase in EMI</td>
</tr></table>
</td></tr>
</table>
<br>
<br>
From the above table it is clear that for the same Loan Amount and rate
of interest the EMI is inversely related to the tenor.<br>
<b class="heading2h">How EMI is calculated?</b><br>
There are types of two methods to calculate the EMI<br>
<b class="heading2h">- Flat rate system</b><br>
In the flat rate system, the rate of interest on the loan amount is calculated
over the entire duration of the loan and the principal plus the interest
is divided over the number of installments and the value arrived is your
EMI. Interest charged on the full amount of a loan throughout its entire
term. The flat rate takes no account of the fact that periodic repayments,
which include both interest and principal, gradually reduce the amount owed.
Consequently the effective interest rate is considerably higher than the
nominal flat rate initially quoted. <br>
<b class="heading2h">Lets Take an Example:</b><br>
Rs.5, 00,000 is the Loan Amount taken for 5 Years at Flat rate of interest
of 15% p.a.<br>
In this case, you have to pay Rs. 75,000 every year as interest (15 % on
Rs. 5,00,000). So for the tenure of 5 years you will need to pay Rs. 3,75,000
(Rs. 75,000 x 5 years) as interest on the loan. The EMI that you would need
to pay for the 60 months will be Rs. 14,584 ( Rs. 5,00,000 (principal) +
Rs. 3,75,000(interest) / 60 months). <br>
<br>
<table width="75%" border="1" align="center" cellpadding="5" cellspacing="0">
<tr>
<td><div align="center"><b>End of Year</b></div></td>
<td><div align="center"><b>Interest paid</b></div></td>
<td><div align="center"><b>Balance Principal</b></div></td>
</tr>
<tr>
<td><div align="center">1</div></td>
<td><div align="center">75000</div></td>
<td><div align="center">400000</div></td>
</tr>
<tr>
<td><div align="center">2</div></td>
<td><div align="center">75000</div></td>
<td><div align="center">300000</div></td>
</tr>
<tr>
<td><div align="center">3</div></td>
<td><div align="center">75000</div></td>
<td><div align="center">200000</div></td>
</tr>
<tr>
<td><div align="center">4</div></td>
<td><div align="center">75000</div></td>
<td><div align="center">100000</div></td>
</tr>
<tr>
<td><div align="center">5</div></td>
<td><div align="center">75000</div></td>
<td><div align="center">0</div></td>
</tr>
</table>
<br>
<br>
<b class="heading2h">- Reducing Balance System</b><br>
Reducing balance is the method of reducing the principal amount repaid,
from the outstanding loan amount. In this case, the interest is charged
on the outstanding principal balance of the loan, which goes on reducing. <br>
<br>
The reducing balance can be further classified on the basis of number of
times the principal is reduced/credited in a year as<br>
• <B class="heading2h">Daily reducing balance:</B> there is immediate reduction in principal thereby
reducing the interest calculated on it.<br>
• <B class="heading2h">Monthly reducing:</B> the principal component is deducted at the end of every
month and then the interest is calculated on this new outstanding reduced
principal. <br>
• <B class="heading2h">Quarterly reducing:</B> principal is reduced 4 times a year.<br>
• <B class="heading2h">Annual reducing:</B> the principal component of EMI though reduced every month,
is summated annually. Therefore, the interest is calculated on the original
loan amount for the entire year. At the end of the year, the accumulated
principal component is deducted from the original loan amount and the interest
for the next year is on this reduced loan amount.<br>
Lets find out the effect of the different methods of
<a href="http://www.deal4loans.com/Contents_Calculators.php">EMI Calculator</a> <br>
<br>
<table width="75%" border="1" cellspacing="0" cellpadding="5">
<tr>
<td><div align="center"><b>Method of calculation</b>
</div></td>
<td><div align="center"><b>Annual reducing</b>
</div></td>
<td><div align="center"><b>Quarterly Reducing</b></div></td>
<td><div align="center"><b>Monthly reducing</b>
</div></td>
<td><div align="center"><b>Daily Reducing</b></div></td>
</tr>
<tr>
<td><div align="center"><b>Loan Amount (Rs)</b></div></td>
<td><div align="center">100000</div></td>
<td><div align="center">100000</div></td>
<td><div align="center">100000</div></td>
<td><div align="center">100000</div></td>
</tr>
<tr>
<td><div align="center"><b>Interest rate (%)</b></div></td>
<td><div align="center">10</div></td>
<td><div align="center">10</div></td>
<td><div align="center">10</div></td>
<td><div align="center">10</div></td>
</tr>
<tr>
<td><div align="center"><b>Tenor / Periodicity of Payment</b></div></td>
<td><div align="center">1Year</div></td>
<td><div align="center">4Quaters</div></td>
<td><div align="center">12 Months</div></td>
<td><div align="center">365 Days</div></td>
</tr>
<tr>
<td><div align="center"><b>Payment Amount (Rs)</b></div></td>
<td><div align="center">110000</div></td>
<td><div align="center">26581.78</div></td>
<td><div align="center">8791.50</div></td>
<td><div align="center">287.937</div></td>
</tr>
<tr>
<td><div align="center"><b>Total interest Paid (Rs)</b></div></td>
<td><div align="center">10000</div></td>
<td><div align="center">6327</div></td>
<td><div align="center">5500</div></td>
<td><div align="center">5097</div></td>
</tr>
<tr>
<td><div align="center"><b>EMI (Rs)</b></div></td>
<td><div align="center">9166</div></td>
<td><div align="center">8860</div></td>
<td><div align="center">8791</div></td>
<td><div align="center">8610</div></td>
</tr>
</table>
<br>
<br>The table above clearly shows that EMI pay out for the same loan amount,
interest and years, is the lowest in case of Daily reducing balance method
and the highest in annual reducing balance method. <br>
This is because in the case of daily reducing balance method you are required
to pay interest on the principal, which is reduced every day. But in case
of annual reducing balance method, the principal is reduced once in a year,
that too at the end of the year.<br>
Another method by which EMI can be classified in case of
<a href="http://www.deal4loans.com/home-loans.php">Home Loan</a> is:<br>
• <B class="heading2h">Step up EMI:</B> This facility is extended, keeping in view the prospective
increase in income of the Borrowers, and is available to people who have
good prospect of future increase in income, viz., young Professionals/Executives.
This facility envisages flexible mode of repayment through Stepping up of
EMI during the tenure of loan. Under this Facility, the EMI will initially
be fixed at a lower amount; this would be changed twice during the Loan
Tenure.<br>
• <B class="heading2h">Step down EMI:</B> Here the scheme is structured that an EMI decreases each
year until the end of the tenor. The first year is the highest and the last
year is the lowest.<br>
• <B class="heading2h">Balloon EMI:</B> A Balloon EMI scheme allows a one-time payment at the end
of the tenor of up to 20% of the principal. The interest is however calculated
for the entire principal and is recovered in the monthly installments<br>
• <B class="heading2h">EMI on Fixed Rate Of Interest:</B> In case of fixed interest rate home loan
scheme, the interest rate charged by HFCs remains fixed or same throughout
the term of the loan.<br>
• <B class="heading2h">EMI on Floating Rate of Interest:</B> Under this scheme, the rate charged
varies with a benchmark, which is the generally prime lending-rate (PLR).<br>
Given the current market condition, the interest rates would remain flat
or increase by a couple of percentage points over the next couple of years,
but if the central bank wants to keep the economy on a high growth path,
it needs to bring down lending rates for priority sectors like housing.
So, Floating rate Loan is better option than Fixed rate Loan for Home Loan.<br>
EMI is the simplest and most commonly availed scheme.The EMI remains the
same throughout the tenor. <br>
<B class="heading2h">Modes of EMI payment:</B><br>
There are two types: <br>
<B class="heading2h">i. Monthly in Advance:</B> Here the first installment is paid in advance. The
number of installments is equal to the number of months in the tenor [for
example: 60 installments if the tenor is 60 months.<br>
<B class="heading2h">ii. Monthly in Arrears:</B> The first installment is due at the end of each
month. The number of installments would be one less than the months in the
tenor [for example: 59 months if the tenor is 60 months]. The interest rate
for an arrears payment would always be slightly higher than the advance
payment.<br>
Payment of EMIs is usually through the below given modes<br>
• <b class="heading2h">Electronic Clearing Service (ECS) </b><br>
ECS is primarily used for receipts and payments which are of a small value
and which are generally repetitive in nature. ECS can be divided into two
types: ECS Debit and ECS Credit. An ECS Debit involves making utility bill
payments directly from your bank account, EMI payments on
<a href="http://www.deal4loans.com/">loans</a>, undertaking
investments, etc.<br>
• Payment by cash<br>
• Payment by Draft<br>
• Post Dated Cheques (PDCs)<br>
• Electronic Fund transfer<br>
• Standing Instructions on Bank Account / Credit Card <br>
<br>
<B class="heading2h">EMI Defaults</B><br>
Normally defaults on EMI payments are made when you dont have the cash
with you due to salary not credited or extra expenditure. So the most important
point while deciding for an EMI is:<br>
• <B class="heading2h">Amount Of the EMI:</B> The amount of the EMI should be such
that it is feasible for you to carry that throughout the tenor of the Loan.<br>
• <B class="heading2h">Date of the EMI:</B> Date at which the EMI is to be paid
to the bank should be decided keeping in mind that whether your salary will
be credited in your account till that or not. Example: if your salary date
is 7th of every month then your EMI should be paid on 10th-15th of every
month to keep all things going. <br>
<br>
So, the crux of the article is that you should choose your EMI on reducing
balance system (monthly). And EMI should be decided keeping in mind the
amount of the EMI and the dates at which it has to be paid the banks should
be in sync with the date on which your salary is credited to avoid the defaults
in payments. <br>
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