Our lives have become very monotonous and dull. It has become a task to accomplish everything that is needed to live a smooth and healthy life. The cost that is involved in such a task is very high and we need support from financial institutions to make to happen. This help is none other than loans which we keep on applying for every time. This loan helps us at that time but stays with us for a long tenure. It keeps on emptying us with the EMI we pay for each loan. But what is an EMI and how does it function? Let us look at it in detail.
An EMI is a monthly installment paid in return of a loan taken for different purposes. It can be a car loan, home loan, personal loan, or any kind of a loan. This EMI is calculated by the bank or the financial institution from where you take the loan. It has a set calculation, depending on the parameters you have chosen. Once all these parameters are updated, a final figure is given to you which is your EMI for the entire tenure. It is an arrangement done by the banks for you to take advance cash to fulfil your dreams. But this advance cash needs to be paid to the banks again in the form of EMI. This EMI constitutes the interest component which is the earnings of such banks and financial institutions. It helps them to earn their cost on offering you loan. This interest would add to the principle amount and you need to divide it by the number of years you would take the loan for.
The idea of an EMI is to pay the principle and the interest in ratios designed by the banks and financial institutions. This helps them to get their cost recovered in the initial years. The basic approach is that interest rate is higher in the EMI as compared to the principle amount and as and when the tenure reduces the principle amount is higher and the interest amount reduces. Consumers would not pay upfront loan amount even if they plan to pre-close, so the banks and financial institutions take privilege and make the most of this setup.
EMI Calculator is just a simple way to know how much you owe to the bank and what is the cost attached to it. EMI calculator is a good way to be on top of things and have your EMI sorted for all the payments. These EMI calculators are available online and can be used as per the preference of the users. If you wish to know how much interest you are paying for a fixed loan amount, it can be known by the EMI calculator and you can also know the total cost that you would pay over and above the principle amount for the tenure.
EMI calculators have many benefits which can help the consumers to know the status of their loan and the exact amount they need to pay in the tenure. But there are a few more benefits which are included in such EMI calculators. Let us look at them in detail.
Different EMI calculators work on different principles. You need to know which loan you require and how does the math work. It would make your life much easier to get a clarity on how and where you can look at in terms of finances. If you apply a simple logic to calculate your EMI, it may bounce back, and you may not get an accurate picture but with the online EMI calculators it is easy to know your actual EMI. Usually an EMI calculator is divided into different parts so that it can be used for specific purposes only. You would get three main EMI calculators online i.e. Car, Home, and Personal loan EMI Calculators.
All calculators have the same inputs i.e. loan amount, interest rate and tenure of the loan. Once you input these numbers, a chart with the data would be ready at the bottom of the page on the right side or preferably as per the bank requirements. But the basic idea is to show the loan EMI with the total interest payable for the tenure and then the total amount you pay including the interest amount. It would show you a breakup of the interest against the loan amount so that you know how much chunk you pay against the loan. This is high in case of a home loan and low in case of personal and car loan. You can also compare the rates of such loans with other top competitors so that you do not feel cheated or duped. With online facility, all such details have become very clear and transparent. Barely can anyone dupe you of your hard-earned money.
Q. What is an EMI?
A. An EMI is a monthly installment paid to the bank or financial institution for the loan taken on many occasions to fulfil the requirements. This EMI is paid for a tenure decided when taking the loan and needs to be repaid without fail.
Q. What if I fail to repay the EMI?
A. The EMI component is very important for your financial CIBIL Score. This would make or break your financial reputation to avail for a loan in the future. If you fail to repay the EMI on regular basis, non-payment fees are charged on your account which keeps on accumulating and an extra interest is also applied to it which would be added to your bill monthly. This interest is very high as compared to your actual interest rate for the loan.
Q. How does my credit get affected?
A. Your credit score is kept as records by CIBIL and is India’s first information bureau for Credit. It ensures that all your records for all loans and its repayments including your financial transactions are kept up to date. If your credit score is not up to the mark, then you would not be able to take a loan in the future unless your score is repaired.
Q. How do I repair my Credit Score through EMIs?
A. EMIs are a great way to take your credit score to an all-time high. This would mean that you should make all your payments on time and should not falter anytime at all. The sad part is that if you are well placed financially and have no loans on your name, your credit score might be completely low, and you would not be able to take loans at all. For you to make your score high, you would have to take a loan and repay it always on time and get your score repaired.
Q. Can the interest rate get any lower than the current rate?
A. The interest rate is directly dependent on the Repo Rate of the bank. This repo rate is nothing but the rate at which RBI lends money to commercial banks. So when the repo rate is high, the lending of money becomes expensive and vice versa.
Q. What is Reverse Repo Rate?
A. Just like repo rate is dependent on the RBI funds, reverse repo rate is dependent on the money circulating in the bank system. To get this money from the banks, reverse repo rate is applied so that the banks park their money for short term to get away with excess liquidity.
Q. How do I get eligible for a loan?
A. You are eligible for a loan if you can repay it on time without any hassles. However, this is not the only thing that is considered. Your overall income minus your daily lifestyle expenses would give your EMI payment capacity. According to this, you would be paid the loan amount. This procedure is for the safety of the bank so that they do not invest in a dead market and make it a bad debt.
Q. What is the documentation I need for a loan?
A. Each loan has different documentation requirements. But you should know the basic documents that are required in any loan procedure. These are one photo ID proof issued by the government and one residence proof. A few photographs and financial documents such as income proofs or income tax returns filed in the last few years. Along with this you need to keep your bank pass book or records updated and clean with no unnecessary transactions in the record to make it evident that you should not get a loan.
Q. What type of interest rate can you opt for?
A. Interest rates are usually decided by the banks depending on the repo rates between the banks and the RBI. However, you can opt for a fixed or floating interest rate in some loans. This is beneficial for you so that you can fix the tenure and the interest you would pay for a long term. For a home loan you can choose the floating interest rate rather than the fixed one. This is because the floating rate may change, and you may get to pay lesser interest rate and improve your chances of repaying the loan on time or may be before time and save some money for you. Other loans, the interest rate is usually fixed and there is hardly and scope for improvement.
Q. Can I repay my loan in advance?
A. Yes you can repay your loan in advance. This is called as a pre-closure of loan. However, in this case, you would have to pay pre-closure charges to the banks or financial institutions as per the agreement while taking the loan. You can pre-close the loan as per your requirement and many banks do offer such schemes where you repay the loan beforehand and get a benefit of lesser interest rate.
Q. Do I need to keep any collateral security for the loan amount?
A. There is a collateral requirement where any assets are not attached with the loan. However, for home loan and car loan, no collateral is required as the asset you purchase becomes the collateral. In case if you fail to make a payment for a period, then the banks and financial institutions would take charge of the asset and sell it to repay their dues. But you would be given a short period to revive your asset. However, if this is not done then the asset would go off in an auction set up by the banks and financial institutions.