When taking a loan, understanding EMI (Equated Monthly Installment) is crucial for effective financial planning. At Today Finserv Consulting India, we simplify financial concepts to help you make informed borrowing decisions.
What is EMI?
EMI stands for Equated Monthly Installment – the fixed payment amount you pay to the lender each month until your loan is fully repaid. It includes:
Principal amount (actual loan borrowed)
Interest component (cost of borrowing)
Key Features of EMI:
✔ Fixed amount paid monthly (some loans allow quarterly payments)
✔ Combination of principal + interest
✔ Remains constant for fixed-rate loans
✔ May change for floating-rate loans if interest rates fluctuate
How is EMI Calculated?
The standard EMI formula is:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
Where:
P = Principal loan amount
R = Monthly interest rate (annual rate ÷ 12)
N = Loan tenure in months
Example Calculation:
For ₹5 lakh loan at 10% interest for 5 years (60 months):
R = 10%/12 = 0.00833
EMI = ₹10,624 per month
- Components of EMI
Every EMI payment consists of two parts:
A. Principal Component
The actual loan amount being repaid
Increases with each EMI as loan tenure progresses
B. Interest Component
The cost of borrowing charged by lender
Higher in initial EMIs, reduces over time
Illustration (First vs Last EMI for ₹5L loan):
Component First EMI
Principal ₹8,291
Interest ₹2,333
Total EMI ₹10,624
Factors Affecting EMI
Factor Impact on EMI
Loan Amount Higher amount = Higher EMI
Interest Rate Higher rate = Higher EMI
Loan Tenure Longer tenure = Lower EMI
Processing Fees Increases effective loan cost
Types of EMI Options
A. Fixed EMI
Most common type
Amount remains constant throughout tenure
Used in personal loans, car loans
B. Flexible EMI
Step-up EMI: Starts lower, increases over time
Step-down EMI: Starts higher, reduces later
Balloon payment: Smaller EMIs + lump sum at end
C. Pre-EMI
Pay only interest initially
Principal repayment starts later
Common in home loans during construction
EMI vs Other Payment Methods
Payment Type Frequency
EMI Monthly
Bullet Payment Lump sum at end
Interest-Only Regular interest payments
Can EMI amount change during loan tenure?
Yes, in two cases:
For floating rate loans when interest rates change
If you make prepayments and reset the EMI
What happens if I miss an EMI payment?
Late payment fees (2-3% of EMI)
Negative impact on credit score
Possible loan default if missed repeatedly
How can I reduce my EMI?
Three options:
Extend loan tenure
Negotiate lower interest rate
Make partial prepayment
Is EMI better than full payment?
Depends on:
✔ Your cash flow situation
✔ Opportunity cost of money
✔ Tax benefits on loan interest
Can I customize my EMI schedule?
Many lenders offer flexible options:
EMI holidays (skip 1-2 payments)
Change payment dates
Switch between EMI types
Smart EMI Planning with Today Finserv
At Today Finserv Consulting India, we help you:
✔ Calculate accurate EMIs for any loan
✔ Compare loan offers based on EMI affordability
✔ Structure EMIs to match your cash flow
✔ Plan prepayments to reduce total interest
