An Equated Monthly Installment (EMI) is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. EMIs 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.
The EMI Formula
The mathematical formula to calculate EMI is:
EMI = [P x R x (1+R)^N] / [(1+R)^N - 1]
Where:
- P = Principal loan amount
- R = Monthly interest rate (Annual Rate / 12 / 100)
- N = Loan tenure in months
How EMI works over time
In the initial years of your loan, a larger portion of your EMI goes towards paying the interest. As the tenure progresses, the interest component decreases, and the principal component increases. This is known as amortization.
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