Definition:
EMI stands for Equated Monthly Installment, which is a fixed payment amount made by a borrower to a lender on a specific date each month. Each EMI payment consists of two components:
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Principal – the original loan amount
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Interest – the cost of borrowing the loan
EMIs are most commonly used in home loans, personal loans, car loans, and other types of installment-based credit.
How EMI Works:
When a loan is taken, the total amount to be repaid (principal + total interest) is divided into equal monthly payments spread over the loan tenure. Over time:
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In the early stages, a larger portion of the EMI goes toward interest.
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In later stages, a larger portion goes toward repaying the principal.
EMI Formula:
EMI=P×R×(1+R)N(1+R)N−1EMI = \frac{P \times R \times (1 + R)^N}{(1 + R)^N - 1}
Where:
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P = Loan amount (Principal)
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R = Monthly interest rate (Annual interest rate ÷ 12 ÷ 100)
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N = Loan tenure (in months)
Example:
If you borrow $10,000 at an annual interest rate of 12% for 2 years (24 months):
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P = 10,000
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R = 12 / 12 / 100 = 0.01
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N = 24
EMI=10000×0.01×(1+0.01)24(1+0.01)24−1≈470.73EMI = \frac{10000 \times 0.01 \times (1 + 0.01)^{24}}{(1 + 0.01)^{24} - 1} \approx 470.73
So, your monthly EMI would be approximately $470.73.