EMI, or equated monthly installment, is the fixed amount that the borrower of the money pays. This money is repaid to the lender. Lenders in these cases are generally the banks or a financial lender.
Let’s watch a movie scene to understand this concept further.
Movie Case Study
The scene shows Lala Kedarnath (played by Akshay Kumar), arguing with Sapna’s father. Sapna’s father wants Kedarnath to marry Sapna, however, Kedarnath is concerned about his financial condition. Currently, he claims that he pays Rs. 15 lakh in EMI every month to the bank.
Kedarnath’s grandfather took a loan in 1942 and signed a contract with the Germans to supply gram (chane) for Rs. 30 lakhs. Kedarnath is now repaying that loan.
What is an equated monthly installment (EMI)?
Kedarnath has to pay such a high amount because of the interest that has accumulated over time. Equated monthly installment or EMI is the fixed amount that is applied to both interest and principal payments.
There are generally two ways to calculate the working of EMI: the reducing balance method and the flat rate method. Reducing balance method is beneficial to the customer as it reduces the loan amount.
How is EMI calculated?
The formula for calculating the EMI is:
P x R x (1+R)^N / [(1+R)^N-1]
where P = Principal amount, this is the amount of loan taken.
R= rate of interest
N= no. of years for which the loan is taken
Let’s understand this with an example, if you take a loan of Rs. 10,00,000 and the interest rate offered by the bank is 8% and the duration is for 10 years then applying the same formula we get:
10,00,000*8/100 (1.08)^10/(1.08)^9
Rs. 7,543 is the monthly amount where the interest comes out to be Rs. 14.43,867 and the principal is Rs. 10,00,000. Hence the total amount payable in 10 years for this individual comes out to be Rs. 24,43,867
