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Banking Term : EMI – Benefits and Disadvantages

Oct 7, 2015 13:45 IST

    It is an acronym for Equated monthly installment (EMI). It is defined as a fixed amount paid by a borrower to a lender at a scheduled date of each calendar year. EMI is used to pay off both principal amount and interest within a stipulated time limit until the loan is fully paid. The rate of interest depends upon the amount of borrowed money and the duration for which is given to the borrower.

    The principal component is lesser than the interest in the initial period of repayment and the interest rate will decrease gradually and the principal amount will increase over the period of repayment.

    How to calculate EMI: -  Following formulae is used for calculating  EMI: -

    Where,

    P= Principal amount (Borrowed)

    A= Amortized periodic payment

    r= periodic interest rate

    n= Total number of payments.

    Benefits of EMI: -  EMI facilitates customer with the following benefits: -

    a. Affordability:- It gives freedom to the consumer to purchase those things which cannot be afforded to make full payments.So, EMI lets consumer to pay for the product in installments.

    b. Flexibility: Loan bearer can make payments as per their income/ financial situation.

    c. Absence of mediator: The EMI is directly paid to the banks/ money lender, that’s why, there is no commission for mediator.

    d. Easy on the Wallet: Loan borrower can choose the amount of borrowed money which can be paid by him easily in each month.

    Disadvantages of EMI: - Besides, above benefits EMI als have following disadvantages: -

    a. Long term Debt: - it means that one has to keep paying payments till the entire loan is paid off.

    b. Provision of penalty: - In any case, if customer is not able to pay the EMI on time, then he will be fined with the certain amount of money.

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