Loans and Equated Monthly Installment (EMI)

Most of us would have taken a loan or are in the process of taking a loan. When you take a loan you have to repay it. One way is to repay a fixed amount of principal every month and the interest on the outstanding till the end of the month. Of course the interest rate would have been decided or is known in advance.

The other option is EMI i.e. the amount repaid every month would be fixed, this amount would include both interest and principal. The formula is the same, from the amount repaid every month, the interest on the outstanding till the end of the month is deducted from the repaid amount and the balance is applied against the principal.

If you notice that in the first method initially your outgo would be high, but total interest paid would be low. In the second method the outgo is the same every month but the interest amount would be high, since initially the interest outgo is high. The main factors which would be considered for calculation on EMI are Interest Rate, Period and Loan Amount

The higher the interest rate higher the EMI, since the EMI should be able to take care of the interest and some amount needs to go towards principal. If it is used only to pay interest, it would go on forever. Shorter the repayment period, higher the EMI and vice versa.

Whenever we take a loan, repayment becomes a commitment. Sometimes, EMI payments become a burden. Especially when you lose your regular source of income or unexpected expenses arise. The best way to come out of such situations is to get rid of the burden at the earliest or postpone the burden.

The second option is the easiest, but remember the lender will never let go of his pound of flesh i.e. interest. Your interest outgo over the period will increase. The other option is prepayment, whenever you have surplus funds prepay, this will help in reducing the period or if you want to keep the period same your EMI will reduce.

Prepayment is the best option; since this will help you get out of debt at the earliest and will curb wasteful or unwanted luxuries.