EMI is breaking down an amount in a way that it is divided into several equivalent smaller parts, spread over a period of time. EMI facilities are provided to repay amounts borrowed from banks, financial institutions, on their financial products or on consumer goods by specific lenders.
It consists of interest, as well as the principal component of the loan to be repaid.
The interest component of the EMI would be larger during the initial months and gradually reduces with each payment.
The exact percentage allocated towards payment of the principal depends on the interest rate. Even though the monthly EMI payment won't change, the proportion of principal and interest components change with time.
With each subsequent payment, allocation towards the principal is more as compared to the interest.
It is recommended to not miss your payments as financial institutions levy heavy penalties on unpaid EMIs, and also affect your credit rating.
Note: The calculations of Emi's can vary depending on the valuation of products offered, and the approach that any specific entity provides. We have offered a generally accepted practice.
EMI = P * r * (1+r)n / [(1+r)n) - 1]
P = amount of loan to be repaid
r = rate of interest
n = tenure of the loan in months
Let us say, a loan of Rs.20 Lakh has been availed at an interest rate of 12% to be repaid in five years time. The EMI works out to Rs.44,489 per month.