How Does EMI Work?
One needs to know how EMI works before opting for an EMI payment.
- EMI is not the same as other variable payment options. In the latter, the borrower can pay a higher sum back based on his will.
- When making an EMI payment, the buyer has to pay precisely the same amount every month until the completion of the EMI period.
Below, we have listed out the necessary points for you to calculate your EMI:
- The rate of interest that the bank or any other lender has charged you.
- The total amount that you have borrowed. This loan amount is also known as the principal.
- The third factor is the time given to you by the bank or any other lender to pay the entire amount, i.e., the loan amount along with the interest.
Terms To Remember
Processing Fee: To avail of EMI, one has to pay a certain nominal fee, which is called the processing fee. This is usually a small amount for every Rs.1000 of the amount one wants an EMI for.
Reduction Of Credit limit: When an individual gets an EMI scheme, their bank blocks the total cost of the product being purchased through the EMI option, thereby reducing that person’s credit. However, the bank will then increase the credit limit every month based on the monthly EMI payment.
Advantages of EMI
- EMI allows you to buy products easily even if you cannot pay the whole amount upfront.
- Using the EMI option to buy things without paying the whole amount upfront can help you not disrupt your savings.
- EMI allows you to buy expensive things (like laptops, cars, bikes) that are beyond your financial capability. This is because instead of finding ways to gather the entire sum of money, one can pay smaller amounts in regular instalments.
- EMI allows borrowers to avoid involving any middleman, and the borrower can pay the lender back directly every month.
- EMI is available on a wide range of products with attractive offers.
- These days, one can also choose their tenure of paying back to the bank or any other lender based on their financial capability.
- Borrowers will also know exactly how much money they have to pay every month to pay their loan off. This will help them plan their finances.
EMI is something that many of us have come across while purchasing something as luxurious as a house or as simple as a laptop. It is important to know the full form of EMI. If you are preparing for a government banking examination, we have other terms that might help you. You can check our website to learn more.
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