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EMI of Loan

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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)

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




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