EMI

An EMI, or equated monthly instalment, is a fixed amount that you pay every month until a loan or a purchase is fully paid off. Each EMI pays back part of the amount borrowed and part of the interest. Indians pay EMIs on home loans, car loans, phones and even school fees.

Here is how an EMI is worked out. The lender takes the amount borrowed, the interest rate and the number of months. From these, it calculates one fixed monthly amount. In the early EMIs, a larger part goes to interest. In the later EMIs, a larger part goes to repaying the amount borrowed. The EMI amount stays the same every month, which makes it easy to plan for. Usually the EMI is deducted from your bank account automatically on a fixed date. Every night, the bank's core banking system deducts the EMIs that are due.

Take, for example, a ₹24,000 television bought on a six-month no-cost EMI. The shopper pays ₹4,000 a month and no interest, because the brand or the shop pays the lender's interest, usually as a discount on the price.

Consider a home loan of ₹40 lakh repaid over 20 years. In the first few years, most of each EMI pays interest, and only a small part reduces the loan.

Say an EMI is not paid on the due date. The lender charges a late fee, reports the missed EMI to the credit bureau, and its debt collection software decides when to send a reminder.

How is an EMI different from buy now, pay later? An EMI is a way of repaying, and almost any loan can be repaid in EMIs. Buy now, pay later is one kind of loan, offered at an online checkout to shoppers who may not have a credit card, and it is usually repaid in EMIs. The lender decides in seconds, using your credit score. With a credit card EMI, by contrast, your card's bank converts a purchase into EMIs.