Loading the player...

What is an 'Equated Monthly Installment - EMI'

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. With most common types of loans, such as real estate mortgages, the borrower makes fixed periodic payments to the lender over the course of several years with the goal of retiring the loan.

BREAKING DOWN 'Equated Monthly Installment - EMI'

EMIs differ from variable payment plans, in which the borrower is able to pay higher payment amounts at his discretion. In EMI plans, borrowers are usually only allowed one fixed payment amount each month. The benefit of an EMI for borrowers is that they know precisely how much money they will need to pay toward their loan each month, which makes their personal budgeting process easier.

Equated Monthly Installment Formulas

The EMI could be calculated using the flat rate method or the reducing balance method. The EMI flat rate formula is calculated by summing the principal loan amount and the interest on the principal. The sum is divided by the number of periods in months.

The EMI reducing balance method is calculated using the formula

(P x I) x ((1 + r)n)/ (t x ((1 + r)n)- 1)

in which P is equal to the principal amount borrowed, I is the annual interest rate, r is periodic monthly interest rate, n is the total number of monthly payments and t is the number of months in a year.

EMI Flat Rate Example

Assume a property investor takes out a mortgage of $500,000, which is the principal loan amount, at an interest rate of 3.50% for 10 years. Therefore, the investor's EMI using the flat rate method is calculated to be $5,625, or ($500,000 + ($500,000 x 10 x 0.035)) / (10 x 12). Note that in the EMI flat rate calculation, the principal loan amount remains constant throughout the 10-year mortgage period. Therefore, the EMI reducing balance method may be more suitable because borrowers typically pay off the monthly balance to reduce the principal.

EMI Reducing Balance Method

Assume that the EMI reducing balance method was used instead of the EMI fixed rate method in the previous example. The EMI would be $1,549, or (($500,000 x (0.035)) x (1 + (0.035 / 12))120;) / (12 x (1 + (0.035/12))120; - 1). Therefore, the EMI reducing balance method is more cost-friendly to borrowers.

RELATED TERMS
  1. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  2. Simple Interest

    A quick method of calculating the interest charge on a loan. ...
  3. Amortized Loan

    A loan with scheduled periodic payments of both principal and ...
  4. Interest Due

    The portion of a current mortgage payment that is comprised of ...
  5. Reverse Mortgage Net Principal ...

    The amount of money a reverse mortgage borrower can receive from ...
  6. Fixed-Rate Payment

    The amount due every period by a borrower to a lender under a ...
Related Articles
  1. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  2. Personal Finance

    Schedule Loan Repayments with Excel Formulas

    Calculate all the particulars of a loan using Excel, and set up a schedule of repayment for a mortgage or any other loan.
  3. Personal Finance

    How Regulations Protect Reverse Mortgage Borrowers

    They're complex animals, which is why there are government guidelines in place to protect borrowers.
  4. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  5. Personal Finance

    3 Best Mortgage Calculator Websites for UK Residents

    Identify the features offered by good U.K. mortgage calculators, and learn where you can find some of the best calculators on the Web for U.K. borrowers.
  6. Personal Finance

    5 Risky Mortgage Types To Avoid

    There are plenty of ways to end up with a bad mortgage. The risks of these five should make every homebuyer think twice before signing.
  7. Personal Finance

    Score a Cheap Mortgage, Here’s How

    Hidden costs can create what looks like a good deal. Find out how to find the best mortgage possible.
  8. Personal Finance

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
RELATED FAQS
  1. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  2. What are some examples of simple interest loans?

    Learn about two common examples of simple interest loans. Understand what simple interest is and learn why it's important ... Read Answer >>
  3. Why is more interest paid over the life of a loan when it is capitalized?

    Learn what it means to capitalize interest on a loan. Understand why more interest is paid over the life of a loan when it ... Read Answer >>
  4. What is PMI, and does everyone need to pay it?

    Also known as "Primary Mortgage Insurance," PMI is the lenders (banks) protection in the event that you default on your primary ... Read Answer >>
Trading Center