Definition
EMI
An EMI (equated monthly instalment) is the fixed monthly payment a borrower makes to repay a loan, comprising both interest and a portion of the principal.
Early in a loan's life, most of each EMI goes toward interest and little toward principal; over time the balance shifts so that later EMIs repay mostly principal. The EMI amount depends on the loan size, interest rate and tenure — a longer tenure lowers the EMI but increases total interest paid, while a shorter tenure does the opposite.
Understanding the amortisation behind an EMI helps borrowers see the true cost of a loan and the benefit of prepayment, which directly reduces principal and saves future interest. Comparing loans on total interest, not just the monthly EMI, prevents being lured by a low payment hiding a long, costly tenure.
Related terms
- Time Value of MoneyThe time value of money is the principle that a rupee today is worth more than a rupee in the future, because today's rupee can be invested to earn returns.
- Pre-EMIPre-EMI is the interest-only payment a borrower makes on a home loan during the construction phase, before the full EMI (principal plus interest) begins on possession.
- Loan-to-Value Ratio (Home Loan)The loan-to-value (LTV) ratio is the proportion of a property's value that a lender is willing to finance through a home loan, with the rest funded by the buyer's down payment.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.