An equated monthly instalment (EMI) is a pre-determined monthly payment made by a borrower to a creditor on a pre-determined date each month.

Each month, EMIs are applied to both interest and principal, and the loan is paid off in full over a period of years. EMIs are crucial since they may be used to finance everything from a smartphone to a whole apartment. Let’s take a closer look at how an EMI works now that we understand what it is. Click here to know about Form Gstr 9a.

## How does An EMI Work

Now that we’ve learnt what an EMI is, let’s look into how it works. EMIs are not the same as flexible payment plans, which allow the borrower to pay higher amounts at his or her discretion. EMI borrowers are typically only authorized to make one fixed payment per month.

Borrowers benefit from an EMI since they know exactly how much money they’ll have to pay each month toward their loan, making personal financial planning easier. Lenders gain from loan interest because it provides a steady and predictable income source.

### How is EMI Calculated?

EMI can be calculated in two different ways. These are the methods:

### The Flat Rate Method

In the flat-rate system, each interest charge is calculated using the original principal amount as the loan is gradually repaid. The EMI is calculated by multiplying the whole loan principle by the total interest, then dividing the total by the number of EMI instalments, which equals the length of the loan period.

On personal loans and auto loans, the flat rate technique is prevalent. Borrowers gain less since interest payments must cover the entire principal amount, resulting in a higher effective interest rate than when the balance is reduced.

### The Reducing Balance Method

In contrast to the flat-rate system, the declining balance method determines the interest payment based on the outstanding principal. This means that the interest and principal payments components of each EMI change.

As a percentage of the outstanding loan, interest payments make up a higher share of the EMI at the start of the loan period. As the loan is repaid over time, the interest amount reduces, and a bigger share of the payments goes toward principal repayments. On house mortgages, credit cards, and overdraft services, the reducing-balance method is frequently used.