Methods To Calculate EMI

Flat Rate: When the loan is repaid in installments, each interest charge is calculated using the original principal amount in the flat rate method. The EMI is calculated by adding the total loan principal and interest to the principal, then dividing the total by the number of EMI installments, which is the time remaining on the loan term. On personal loans and auto loans, the flat rate strategy is popular. Borrowers benefit less from this strategy because interest payments must cover the entire principal amount, resulting in a higher effective interest rate than the reducing-balance strategy. Short-term loans, such as vehicle and motorcycle loans, typically have a Flat rate of interest.

Reducing Balance: In contrast to the flat rate method, the reducing balance strategy determines the interest payment based on the outstanding principal. This means that the interest and principal payment components of each EMI change. As a percentage of the outstanding loan, interest payments make up a higher amount of the EMI at the start of the loan period. As the loan is repaid over time, the interest amount reduces and a greater proportion of the payments go toward principal repayments. On house mortgages, credit cards, and overdraft services, the reducing-balance method is frequently used.

EMI Stands for Equated Monthly Payment.

An equated monthly installment (EMI) is a fixed monthly payment made by a borrower to a creditor on a predetermined date. Each month, EMI is composed of a principal sum and an interest amount that a borrower must pay back over a set number of years in order to fully repay the loan. EMI is calculated using the loan amount, loan term, and interest rate charged by the bank on the loan.