EMI stands for Equated Monthly Installment and is the amount paid by borrowers each month to the lender of the loan.
According to Investopedia, EMI is defined as:
“A fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly installments are used to pay off both interest and principal each month, so that over a specified number of years, the loan is paid off in full”.
EMI is the monthly repayment of a loan to its lender. Generally, these lenders comprise of any person, investor, banks, private financial holders etc. The loan amount of any loan such as a home loan, car loan or personal loan is to be paid back through a series of monthly payments (generally via monthly cheques). The EMI is to be paid until the entire loan amount does not get completed. EMI is directly proportional to the loan amount taken, and inversely proportional to time period; that is, if the loan amount increases, EMI also increases; while if the time period increases, EMI decreases.
EMI comprises of two main components: the principal amount and interest rate. The component of interest amount remains higher in the initial years and gets reduced over the years, while the component of principal amount lowers during the initial years and raises as the years passes.
The EMI is calculated by adding the principal amount borrowed and interest, then dividing the total with the number of months, in which an individual desires to pay the total loan amount. These are paid in the form of installments called EMI.
The formula for EMI calculation is:
E = P × r × (1 + r) n / ((1 + r) n - 1)
Where, P = Principle Loan Amount
r =is rate of interest calculated in monthly basis.