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Coming to grips with EMI

Larissa Fernand

It is one term that never fails to baffle. Most people take a loan sometime or the other, or at least contemplate on taking one. And whichever be the loan opted for, they will be forced to contend with this word. So, here's to a better understanding.

The equated monthly installment (EMI) refers to the amount of money that you will have to pay every month to the financier. Since you will be dishing out an EMI on a monthly basis, the 12 installments at the end of the year are referred to as equated annual installment (EAI).

When you take a loan, the rate of interest, the loan amount and the repayment tenure are taken into consideration to fix the EMI. Though, it remains constant all through the repayment tenure, in actuality it is an unequal combination of principal repayment and interest.

The EMI payments at the start of the loan are very heavily tilted towards interest payments and principal repayments take place towards the end of the loan tenure. Hence, you end up paying more since the principal gets paid only at the end of the tenure. Confused? Take a look at the example below. In the first year, you repay just Rs 4,561 of the Rs 2,00,000 that you owe the financier. During the final repayment year, you pay Rs 28,562 of the principal.

What comprises the EMI

Repayment tenure: 15 years

Rate of interest: 14 per cent per annum calculated on an annual reducing basis

EMI (what you will be paying every month): Rs 2,713.4825

EAI (what you will be paying every year): 2,713.4825 x 12 = Rs 32,561.79

Year	Principal Outstanding	Equated annual installment	Interest component	Principal component
1	2,00,000	32,561.79	28,000.00	4,561.79
2	1,95,438.21	32,561.79	27,361.35	5,200.44
3	1,90,237.76	32,561.79	26,633.29	5,928.51
4	1,84,309.26	32,561.79	25,803.30	6,758.50
5	1,77,550.76	32,561.79	24,857.11	7,704.69
6	1,69,846.08	32,561.79	23,778.45	8,783.34
7	1,61,062.73	32,561.79	22,548.78	10,013.01
8	1,51,049.72	32,561.79	21,146.96	11,414.83
9	1,39,634.89	32,561.79	19,548.88	13,012.91
10	1,26,621.99	32,561.79	17,727.08	14,834.71
11	1,11,787.27	32,561.79	15,650.22	16,911.57
12	94,875.70	32,561.79	13,282.60	19,279.20
13	75,596.50	32,561.79	10,583.51	21,978.28
14	53,618.22	32,561.79	7,506.55	25,055.24
15	28,562.98	32,561.79	3,998.82	28,562.98

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