Q1: What is EMI and how is it calculated?
EMI (Equated Monthly Installment) is the fixed payment amount made by a borrower to a lender at a specified date each calendar month. It is calculated using the formula: EMI = [P × R × (1+R)^N] / [(1+R)^N - 1], where P is the principal loan amount, R is the monthly interest rate, and N is the number of monthly installments.
Q2: What factors affect my EMI amount?
Three main factors affect your EMI: the principal loan amount (higher amount = higher EMI), the interest rate (higher rate = higher EMI), and the loan tenure (longer tenure = lower EMI but more total interest paid).
Q3: Is it better to choose a longer or shorter loan tenure?
A longer tenure reduces your monthly EMI but increases the total interest paid over the loan lifetime. A shorter tenure increases monthly EMI but reduces total interest. Choose based on your monthly cash flow capacity and total cost preference.
Q4: Can I prepay my loan to reduce EMI?
Prepayment typically reduces the principal amount, which can either reduce your EMI (if you recalculate) or shorten your loan tenure while keeping the same EMI. Check with your lender about prepayment policies and any charges.
Q5: How does the interest rate affect my total payment?
Even a small difference in interest rate can significantly impact your total payment. For example, on a $100,000 loan over 20 years, a 1% rate difference can mean thousands of dollars in additional interest. Always compare rates from multiple lenders.
Q6: What is the difference between reducing balance and flat rate interest?
Reducing balance (used in EMI calculation) applies interest on the remaining principal, so interest decreases over time. Flat rate applies interest on the original principal throughout the loan term, resulting in higher total interest. Most loans use reducing balance method.