Money

EMI or Equated Monthly Instalment is a fixed amount of money paid by a borrower to a lender every month at a specified date to pay off a loan in a given time period.

EMI is dependent on the following factors.

- Principal - the amount borrowed
- Rate of Interest
- Tenure of the loan

An EMI is made up of a certain amount of the Principal borrowed and a certain amount of Interest.

EMI = Interest Component + Principal Component

The first EMI has the highest interest component and lowest principal component.

With every instalment, the interest component decreases and principal component increases.

The last EMI has the lowest interest component and highest principal component.

Yes. Some of the factors that can change the monthly EMI are as follows.

- Partial payment of the EMI.
- Failing to pay the EMI on the due date

Following is the formula to calculate EMI.

```
r (1 + r)
```^{n}
EMI = P . --------------
(1 + r)^{n} - 1

Where, `P`

is the Principal (money borrowed).

`n`

is the total number of payments. If loan taken from 2 years and EMI is paid monthly then, `n = 2 x 12`

i.e. `n = 24`

.

`r`

is the interest rate divided by 100.

If EMI is paid once a year and rate is 10.5% p.a. then, `r = 10.5/100`

i.e. `r = 0.105`

.

If EMI is paid every month and rate is 10.5% p.a. then, `r = 10.5/(100x12)`

i.e. `r = 0.00875`

.

Let's say Tom borrowed INR 100,000 from a Bank at 10% rate of interest. He agreed to pay the loan in 12 monthly instalments.

So, Tom will pay **INR 8,791.59** as monthly EMI.

Principal (loan borrowed) | 100,000 |

Extra amount paid | 5,499.06 |

Amount Returned | 105,499.06 |

We can see that Tom pays **INR 5,499.06** as interest.

Instalment # | EMI | Amount Returned |
---|---|---|

1 | 8,791.59 | 8,791.59 |

2 | 8,791.59 | 17,583.18 |

3 | 8,791.59 | 26,374.77 |

4 | 8,791.59 | 35,166.35 |

5 | 8,791.59 | 43,957.94 |

6 | 8,791.59 | 52,749.53 |

7 | 8,791.59 | 61,541.12 |

8 | 8,791.59 | 70,332.71 |

9 | 8,791.59 | 79,124.3 |

10 | 8,791.59 | 87,915.89 |

11 | 8,791.59 | 96,707.48 |

12 | 8,791.59 | 105,499.06 |

TOTAL | 105,499.06 |

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Check out this EMI calculator.

See you in the next tutorial.

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