An Equated Monthly Installment (EMI) is A fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly installments are used to pay off both interest and principal each month, so that over a specified number of years, the loan is paid off in full.
The Equated Monthly Installment (EMI) depends on three factors: loan amount, interest rate and the duration of the loan.The EMI has an interest and a principal portion. Through the principal, the borrower repays the loan each month. Through the interest, he pays the bank the interest due on the outstanding loan amount. The Equated Monthly Installment (EMI) are structured in such a way that the interest portion forms a major part of the payment that is made in the initial years. In the later years, the principal component becomes high. The Equated Monthly Installment (EMI) can change in the case of an alteration in interest rates or if there is a prepayment. It is also possible to keep the Equated Monthly Installment (EMI) constant and increase or decrease the tenure of the loan to reflect the changes in interest rates or loan prepayment.