Article

Equated Monthly Installment (EMI)
June 07 , 2012

When you take a loan, you begin repaying the principal immediately, along with interest. As the repayment starts, the interest to be paid on the outstanding would also drop. Thus, if a fixed portion of the loan principal were being repaid every month, your total payment would drop every month. This would make planning your cash-flow difficult. Worse, it would make your initial payments too large to bear.

Instead, what is done is to make the total payment a constant (i.e. principal plus interest). This total is called the Equated Monthly Installment (EMI). Obviously, in initial period the interest is higher, since more principal is outstanding. In the later years, the principal getting repaid starts increasing and interest drops. It's hardly necessary to break your head on computation of the EMI, since MS Excel gives a ready function 'pmt' to calculate EMI, given the loan, the interest rate and the tenure.

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