What is EMI?
EMI Equivalent Monthly Installment is a set monthly installment provided by the borrower to the lender on a given day every month. EMIs are applied to both interest and principal every month and the loan is repaid in full over a few years.
Now that we understand what EMI means, let’s dive deeper into how it works.
How does EMI work?
We have learned the meaning of EMI, but let’s now learn how it works. Flexible payment terms, in which the borrower can pay higher amounts as per his choice, are not the same as EMIs. Borrowers in EMI programs are usually allowed to make only one fixed payment per month. Borrowers benefit from EMIs as they know exactly how much money they will have to pay on their loan every month, making personal financial planning easier. Lenders benefit from loan interest because it provides a consistent and predictable income stream.
What is equated monthly instalment (EMI) ?
1. EMI – Equivalent Monthly Installment – refers to the total amount that the buyer undertakes to pay for the loan during the month. This can vary depending on the lender, interest rate and loan term.
2. APR – Annual Percentage Rate – This is the percentage rate by which the borrowers’ monthly payment is increased if they fail to make the payment before the due date. The APR does not take into account additional fees associated with the loan, including late payment penalties.
3. Interest rate – The interest rate charged for the loan is expressed as a percentage of the principal amount each month. In most cases, unless otherwise stated, the rate will remain constant throughout the life of the loan.
4. Duration – The duration is the time during which the Borrower is obliged to make monthly payments; The longer the maturity period, the lower the initial cost of the loan. After the loan is repaid, the balance becomes the borrower’s responsibility until the end of the term.
5. Loan Amount – How much cash a customer can borrow under a certain type of loan. This amount may vary for different types of loans.
6. Down payment – A down payment refers to the part of the purchase price that the customer pays in advance. It is important to note that the down payment varies depending on the type of financing chosen.
7. Total Payments – Total payments represent the total number of payments made over the life of the loan. A negative amortization loan is one where the total repayment exceeds the closing costs.
8. Closing Costs – The fee charged by the lender to cover the administrative costs associated with closing a loan transaction is usually a non-refundable fee. These costs can be significant and should always be taken into account when choosing a loan product.
9. Grace period – Borrower plans to use equity before making further payments. The shorter the grace period, the higher the initial interest rate is likely to be.
10. Prepayment Penalty – A prepayment penalty is a fee charged to borrowers who choose to pay off their mortgage early. If the borrower chooses to refinance their loan before the end of the original term, they may be charged a prepayment penalty.
11. Repayment Mode – Repayment mode refers to whether the borrower is able to repay the loan in a lump sum or in installments. Most types of mortgages require repayment in installments.
12. Mortgage Insurance – Mortgage insurance is third-party insurance that provides protection to borrowers in the event that the borrower defaults on the loan. Homeowners often need to obtain mortgage insurance before financing.
13. Establishment Fee – The establishment fee is usually included in the final cost of the loan and is a fee set by the lender to assess the creditworthiness of the applicant.