trainingtrains Logo

91-9990449935

 0120-4256464

JavaTpoint

What is the full form of EMI

EMI: Equated Monthly Installment

EMI stands for Equated Monthly Installment. It is a fixed payment amount which a borrower pays to a moneylender at a specific date of each month for a specific period of time. Emi consists of a principal component and interest component that a borrower is supposed to pay to lender over a specific number of years to pay off the loan in full.

EMI full form

How to calculate EMI

With each EMI you pay a portion of the whole principal loan and a portion of the total interest. So, to calculate the EMI you must know the loan principal, type of rate of interest and total duration to pay off the loan. The rate of interest can be of types, flat interest rate and diminishing balance interest rate. Accordingly, there are two different methods to calculate the EMI.

Flat interest rate:

The interest is calculated on the whole principal loan without considering the fact that with each EMI the principal amount is getting reduced. For example, a person wants to buy a car and takes a car loan of 3 lakh, at a flat interest rate 12% and has to pay off it in 3 years then the EMI can be calculated as shown below:

  • Principal amount: 300,000

  • Flat rate of interest: 12%

  • Total duration: 3 years

EMI: Principal amount (300,000) is divided by 36 months + 12% of principal amount divided by 12 months = 8333+3000=11.333

Flat rate of interest is usually applied on short term loans such as car loan and two-wheeler loan.

Diminishing balance interest rate:

In case of Diminishing balance Interest rate, the interest amount varies each month as for the first month interest is calculated on the whole principal loan and for the subsequent months interest is calculated on the outstanding loan amount. The formula or method to calculate the reducing interest amount is given below:

  • Principal Loan Amount= 300,000
  • Diminishing rate of Interest=12%
  • Duration: 3 year Interest for first month = loan amount (300, 000)*(1/12*)*(12/100) =3000 Interest for second month= (outstanding loan amount)*(1/12)*(12/100)
Next TopicFull Form