What Is an Equated Monthly Installment (EMI)?

Here’s the breakdown of this EMI payment:

  • You borrow $15,300 (the original loan amount plus fees the lender rolled into the loan).
  • At 6%, you pay $2,448 in interest.
  • That means the actual cost of the loan is $17,748 ($15,300 + $2,448).
  • You have a 60-month loan term, so the EMI dictates that you make equal monthly payments of $296 ($17,748 ÷ 60 equal payments = $296).

Scientific calculation

The official calculation for EMI is: P = L[r(1 + rn] / [(1 + r)n – 1]

While it is unlikely you will need to know the exact formula, the important thing to remember about EMI is that it is calculated by adding your principal balance to the interest paid, and dividing that total by the number of months you have to pay the loan.

Shopping around for a lender is important, because you can’t always determine which loan will be least expensive by solely comparing interest rates. While the loan interest rate is important, it doesn’t tell the entire story.

Fees vary widely by lender. While one lender may charge a slightly higher interest rate, that lender may offer loans with no fees. Another may advertise a lower rate, but tack on fees that mean you pay more in total.

If a lender charges $750 in fees, you don’t just pay $750. When the fees are rolled into the loan, you also pay interest on that $750. Here’s how much extra you’ll pay:

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View more information: https://www.fool.com/the-ascent/personal-loans/what-equated-monthly-installment/

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