EMI is the short form of Equated Monthly Installment. In EMI Installment and interest on remaining loan balance both are included. It is the general phenomena in which installment and interest both makes the equal amount to pay at every month during loan tenor. There are some important points to understand before accepting EMI system of payments.
EMI doesn’t mean to pay less interest in comparison of traditional old concept of equal installments of principal amount and actual interest thereon. There are two types of loan payment systems. One is most popular EMI and other is Reducing Balance System.
Let us take one example:
|
LOAN AMOUNT Rs. |
100000.00 |
|
|
LOAN TENOR |
2 YEARS |
MONTHLY PAYMENT |
|
INTEREST RATE |
10% |
MONTHLY PAYMENT |
|
INSTALLMENTS PAYMENT -1st DAY OF EVERY MONTH. |
||
|
MONTHLY EMI Rs. |
4614.49 |
|
|
FORMULAE OF EMI : EMI =(LOAN AMOUNT*INTEREST RATE/1200) * ((1+10/1200)^24) /(((1+10/1200)^24)-1) |
||
|
IN EXCEL WE CAN USE: EMI=(100000*10/1200) *POWER((1+10/1200),24) /(POWER((1+10/1200),24)-1) |
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Here, we have to pay Rs. 4614.49 of EMI every month. Generally, every company ask us to pay these EMIs during first 10 days of every month otherwise they charge penalty on that late payments. Here, we are making total payment during 24 month comes to 4614.49 * 24 = 110747.82 If, we deduct loan amount from total payment it comes to Rs.10747.42 which is interest portion paid during loan tenor.
Suppose, we make the installment payment at the 1ST day of every month, and we accept to pay traditional system of equal principal and actual interest payment, we have to pay less interest in comaprision of EMI system!
|
A |
B |
||||||||
|
EQUAL PAYMENT OF PRINCIPAL & ACTUAL INTEREST Reducing Balance System |
EQUATED MONTHLY INSTALLMENT |
||||||||
|
NO. |
LOAN OPENING BALANCE |
TOTAL MONTHLY PAYMENT |
PRINCIPAL INSTALLMENT PAYMENT |
INTEREST |
CLOSING BALANCE |
LOAN OPENING BALANCE |
PRINCIPAL INSTALLMENT PAYMENT |
INTEREST |
CLOSING BALANCE |
|
1 |
100000 |
4965.67 |
4166.67 |
799 |
95833.33 |
100000 |
3781.16 |
833.33 |
96218.84 |
|
2 |
95833.33 |
4930.67 |
4166.67 |
764 |
91666.66 |
96219 |
3812.67 |
801.82 |
92406.17 |
|
3 |
91666.66 |
4895.67 |
4166.67 |
729 |
87499.99 |
92406 |
3844.44 |
770.05 |
88561.73 |
|
4 |
87499.99 |
4860.67 |
4166.67 |
694 |
83333.32 |
88562 |
3876.48 |
738.01 |
84685.25 |
|
5 |
83333.32 |
4826.67 |
4166.67 |
660 |
79166.65 |
84685 |
3908.78 |
705.71 |
80776.47 |
|
6 |
79166.65 |
4791.67 |
4166.67 |
625 |
74999.98 |
80776 |
3941.35 |
673.14 |
76835.12 |
|
7 |
74999.98 |
4756.67 |
4166.67 |
590 |
70833.31 |
76835 |
3974.20 |
640.29 |
72860.92 |
|
8 |
70833.31 |
4722.67 |
4166.67 |
556 |
66666.64 |
72861 |
4007.32 |
607.17 |
68853.6 |
|
9 |
66666.64 |
4687.67 |
4166.67 |
521 |
62499.97 |
68854 |
4040.71 |
573.78 |
64812.89 |
|
10 |
62499.97 |
4652.67 |
4166.67 |
486 |
58333.3 |
64813 |
4074.38 |
540.11 |
60738.51 |
|
11 |
58333.3 |
4617.67 |
4166.67 |
451 |
54166.63 |
60739 |
4108.34 |
506.15 |
56630.17 |
|
12 |
54166.63 |
4583.67 |
4166.67 |
417 |
49999.96 |
56630 |
4142.57 |
471.92 |
52487.6 |
|
13 |
49999.96 |
4548.67 |
4166.67 |
382 |
45833.29 |
52488 |
4177.09 |
437.40 |
48310.51 |
|
14 |
45833.29 |
4513.67 |
4166.67 |
347 |
41666.62 |
48311 |
4211.90 |
402.59 |
44098.61 |
|
15 |
41666.62 |
4478.67 |
4166.67 |
312 |
37499.95 |
44099 |
4247.00 |
367.49 |
39851.61 |
|
16 |
37499.95 |
4444.67 |
4166.67 |
278 |
33333.28 |
39852 |
4282.39 |
332.10 |
35569.22 |
|
17 |
33333.28 |
4409.67 |
4166.67 |
243 |
29166.61 |
35569 |
4318.08 |
296.41 |
31251.14 |
|
18 |
29166.61 |
4374.67 |
4166.67 |
208 |
24999.94 |
31251 |
4354.06 |
260.43 |
26897.08 |
|
19 |
24999.94 |
4340.67 |
4166.67 |
174 |
20833.27 |
26897 |
4390.35 |
224.14 |
22506.73 |
|
20 |
20833.27 |
4305.67 |
4166.67 |
139 |
16666.6 |
22507 |
4426.93 |
187.56 |
18079.8 |
|
21 |
16666.6 |
4270.67 |
4166.67 |
104 |
12499.93 |
18080 |
4463.82 |
150.67 |
13615.98 |
|
22 |
12499.93 |
4235.67 |
4166.67 |
69 |
8333.26 |
13616 |
4501.02 |
113.47 |
9114.96 |
|
23 |
8333.26 |
4201.67 |
4166.67 |
35 |
4166.59 |
9115 |
4538.53 |
75.96 |
4576.43 |
|
24 |
4166.59 |
4166.59 |
4166.59 |
0 |
0 |
4576 |
4576.43 |
38.14 |
0 |
|
TOTAL |
109583.00 |
100000.00 |
9583 |
TOTAL |
100000.00 |
10747.84 |
|||
The difference in total interest payment comes due to payment date. In EMI system installments are made on the assumptions that we make payments on the last day of the month. But actually we are paying them in the first week but that is credited on the last day of the month. So, if we are punctual in payment we should adopt first position instead of EMI system. We can see that in the first system not only we are getting less payment of interest but also we can make early payment and reduce our interest from that date. Because in first system it is actually reducing balance system.
Beware of Advance EMI payment. It is nothing but down payment with interest! If we make advance payment of 2 or 3 EMI we are making with interest Installment payment which will increase actual rate of interest.
Another most important point to be viewed here is of 0% interest finance. Most of the dealers offers 0% interest finance on many consumer durables. For that they say that we have to pay only principal amount and not interest. For that they count principal amount on MRP basis and they makes installments of MRP amount. But, if we insist on to pay cash they give 5 to 10 % discounts on MRP. If we purchase by installments they give facility of nearly 10 installments but for that we have to forgive that discount. This discount is the actual interest we have to pay for installments. Thus there is nothing like 0% interest finance. If we get installments without interest on not MRP but on discounted price then only we get actual 0% interest finance. So, every time ask for discount as if we are paying fully cash and ask installments on that price to get 0% interest finance.
DIPESH SHAH
CAclubindia
