Sumeet has been impressed by the features of Samsung’s latest flagship smartphone, the Galaxy S23 Ultra. Sumeet who is a graphic designer by profession is a technology enthusiast and does not want to miss an opportunity of having hands on the latest gadgets. The versatile phone could be very useful for Sumeet in streamlining his work.
Did you ever find yourself in a similar situation? You can hope of buying the Samsung Galaxy S23 Ultra or an iPhone, but the thought of spending a significant amount stops you from owning such devices. Here is where EMIs (equated monthly instalments) come into the picture. EMIs allow you to convert a single purchase into smaller, manageable instalments spread across a fixed tenure. Monthly instalments help you avoid straining your finances while making it easy to manage your monthly budget.
What is an EMI (Equated Monthly Instalment)?
A popular financial term in the realm of loans and financing is EMI. EMI full form stands for equated monthly instalments and it refers to the fixed sum of money paid by borrowers to lenders each month, encompassing both the principal loan amount and the interest accrued on it.
The EMI meaning lies in its structure: it’s a structured repayment method that facilitates affordability for borrowers by breaking down a larger loan amount into manageable monthly payments over a predetermined period, typically ranging from a few months to several years.
What is EMI payment, precisely? It represents the borrower’s commitment to repay the loan, ensuring consistent and structured payments over the loan tenure. Each EMI consists of two components: the principal amount (the actual loan amount) and the interest charged by the lender for borrowing that sum.
Calculating an EMI involves complex mathematical formulas that consider the loan amount, interest rate, and loan tenure. Lenders employ various tools and online calculators to determine the EMI amount, aiding borrowers in understanding their repayment obligations before committing to a loan.
In essence, EMI payments provide borrowers with a structured approach to manage their financial obligations, making high-value purchases or investments more accessible without imposing an immediate and overwhelming financial burden.
Understand your EMIs with amortisation schedule
To understand EMIs, you must first know about the loan amortisation schedule. An amortisation schedule is a table showing the details of each payment you make against the loan and displays how EMI works. It is provided to you after you purchase anything on EMI, as it helps borrowers understand the repayment structure.
Part of your EMI payment covers the interest charges, and the rest goes towards reducing the principal amount. Over time, the percentage of EMI that goes towards interest decreases, and the portion that goes towards the principal rises. The amortisation schedule informs you about the changes in principle and interest amounts and helps you see what your EMI payment for each instalments is.
Let us assume you want to buy a smartphone for Rs. 1,00,000. Instead of making a lump-sum payment, you opt for a more manageable route and purchase the device in equated monthly instalments. The EMI comes to around Rs. 17,254.84 per month (over six months).
In the first month, you pay Rs. 1,000 as interest, and the rest – Rs. 16,254.84 – goes towards the principal amount. This reduces your outstanding loan balance to Rs. 83,745.16. This process continues smoothly over the next five months. In the sixth month, you pay your last EMI of Rs. 17,254.84. You have finally paid off your loan in full, and the Samsung Galaxy S23 Ultra is entirely yours, with no outstanding EMIs.