Introduction
EMI stands for Equated Monthly Instalment. It 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 period, the loan is fully paid off.
In India, EMIs are commonly used for:
- Home loans
- Car loans
- Consumer durable purchases (phones, laptops, TVs)
- Credit card purchases converted to instalments
How EMI Works
When you choose to pay via EMI, the lender (bank or financing company) pays the full amount to the merchant on your behalf. You then repay the lender in monthly instalments.
The EMI Formula
The EMI amount is calculated using the following formula:
EMI = P × r × (1 + r)ⁿ / ((1 + r)ⁿ — 1)
Where:
- P = Principal loan amount (product price minus down payment)
- r = Monthly interest rate (annual rate divided by 12)
- n = Loan tenure in months
Components Of EMI
Principal
The original amount you borrow. This is the product price minus any down payment.
Interest
The cost of borrowing money. Banks charge interest on the outstanding principal.
Tenure
The period over which you repay the loan. Common tenures range from 3 to 24 months for consumer goods.
Advantages
- Affordable monthly payments: Spread the cost over several months
- Buy now, pay later: Get the product immediately without paying the full amount upfront
- Fixed payments: Know exactly how much you need to pay each month
- Build credit history: Regular EMI payments help improve your credit score
Disadvantages
- You pay more: Interest increases the total cost of the product
- Long-term commitment: You are obligated to pay for the entire tenure
- Processing fees: Banks charge upfront fees for processing the EMI
- GST on charges: 18% GST is applicable on processing fees and interest
Example
Consider a product priced at ₹60,000 purchased with a 12-month EMI plan at 15% annual interest:
| Component | Amount |
|---|---|
| Product Price | ₹60,000 |
| Monthly EMI | ~₹5,420 |
| Total Payment | ~₹65,040 |
| Total Interest | ~₹5,040 |
| Processing Fee (2%) | ₹1,200 |
| GST on Fee (18%) | ₹216 |
| Total Cost | ~₹66,456 |
Related Calculators
Related Guides
Disclaimer
This guide is for educational purposes only and does not constitute financial advice. Interest rates, processing fees, and terms vary by bank and are subject to change. Always verify terms directly with your bank or financial institution before making a purchase decision.