EMI stands for Equated Monthly Installment. This is the fixed amount of amount paid by the borrower on each month. This will help you to pay off your debt on an installment basis. Initially, a major part of the EMI goes in paying the interest. As the tenure increases the principal component of the loan increases. In other words, EMI is a fixed amount paid by a borrower to a lender at a specified date in each month. Equated monthly installments are used to pay off both interest and principal each month, so that over a specific number of years, the loan is paid off in full. If you are taking a mortgage loan and repaying it by EMI, you have to pay a fixed amount of money every month. The difference between EMI and other variable payment plan is that your installment amount is fixed in EMI.
Interests are generally calculated on a month or sometimes every three months period. The calculated interest on the principal amount (loan amount) is added with the principal itself and then the repayment amount (EMI) is deducted from this sum to arrive at a balance amount. At the next step, the interest is calculated on the last balance amount and the new reducing balance amount is obtained in the same way. This process is continued iteratively until the balance amount reduces to zero. And thenthe loan is fully repaid.
Balance amount = Previous balance amount + Interest on the balance amount – Repayment amount.
While applying for a home loan you have to answer the following questions
- How much loan you want
- What is the value of the property
- What is the term you are looking for
- What’s your gross salary & Net salary
If you miss your home loan EMI
There are many reasons that cause us to fall behind loan repayments. Loss of job, medical expenses, etc can happen to anyone, this will make us to delay the repayment of loans. If you neglect payments ofhome loan EMI, it will hurt your credit rating and many other severe implications could follow. In case you default on your home loan repayments the lenders undertake some measures to recover the amount:
- Lenders follow up by sending the collection agents to recover the due amount.
- Then the lenders follow up with the person who co-signed the loan documents.
- As a consequence of default in payment the borrower might lose possession of the house.
According to the Securitisation Act, housing companies have the right to take over the house property of the defaulting customer. They can classify the asset secured or mortgaged as a non-performing asset and give a 60 day’s notice to the borrower. If the borrower fails to clear off his liability within this period, the lending institution has four options such as;
- Take possession of the asset
- Take over the management of the asset of the borrower
- Appoint any manager to manage the asset
Redressal
If you are planning to seek a remedy after defaulting on your EMI, you have to file an appeal to the Debt Recovery Tribunal (DRT) within 45 days. If the order of Debt Recovery Tribunal is against you, then an appeal has to be filed before the Appellate Tribunal within 30 days of receiving it. If the Appellate Tribunal is finding that the possession of the asset taken by the lender was wrongful, the Tribunal may direct them to return it back to the borrower, along with adequate compensation.
Other options for Redressal
It is not necessary that you have to do a legal battle with your lender, unless the lender initiates legal proceedings against you. Contact him as soon as you know your payments will be overdue. Never ignore the lender’s letters and do not imagine you are in a hopeless situation. Following are some of the steps, which you can take to keep property’s possession with you.
- Talk to the lender
- Refinance your debt
- Balloon repayment scheme
- Lower your EMI by changing the payment plan
Talk to the lenderFinanciers make money by collecting your principal and interest payments, not by foreclosing on homes. Foreclosing is the process by which mortgaged property enters into the possession of the mortgagee without right of redemption by the mortgagor. If you present your situation to them along with a reasonable plan for temporary relief, they may suggest some plan to help you.
Refinance your debt
There is a possibility that you might build your home when interest rates were high and, therefore, your EMI is high. You can solve this problem by refinancing your debt at a lower interest rate.
Balloon repayment scheme
You also have the option to pay lower EMI in the initial years and a bulk payment in the last installment so that the major burden can be shifted to the later years.
Lower your EMI by changing the payment plan
If you are not able to pay the existing EMI, by increasing your repayment period you can considerably reduce your monthly installment. If you have taken the loan for 15 years then you can extend it to 20 years. But always remember even though your monthly payment may decrease, you will end up in paying more by way of interest since it will take longer timeto pay off the loan.
How to calculate EMI
Below given is the equation to calculate EMI.
EMI = [(P x r) (1+r) n]/ [(1+ r) n-1]
Here
P = Principal Loan Amount
r = Annual Interest Rate / 12
n = Number of Monthly Installments
Click here to calculate EMI
Illustration
The below given illustration will help you in understanding how EMI works. Imagine you are taking a home loan of Rs. 10,00,000 with an interest rate of 10% for a period of 10 years. In this case your EMI will be around Rs. 13,562. Your EMI constitute a certain amount of Principle and Interest. But the amount of interest and principal will change as the time goes.
Here
Loan Amount – 10,00,000
Interest rate – 10%
Tenure - 10 years
EMI – 13562
This table illustrates the amount of interest and principal included in EMI
| Year | Interest/month | Principal/month | EMI |
| 1 | 8333 | 5229 | 13562 |
| 2 | 7810 | 5752 | 13562 |
| 3 | 7235 | 6327 | 13562 |
| 4 | 6603 | 6959 | 13562 |
| 5 | 5907 | 7655 | 13562 |
| 6 | 5141 | 8421 | 13562 |
| 7 | 4299 | 9263 | 13562 |
| 8 | 3373 | 10189 | 13562 |
| 9 | 2354 | 11208 | 13562 |
| 10 | 1233 | 12329 | 13562 |
A combination of interest and Principal makes EMI but. Over a period of 10 years you will pay an amount of Rs.1627440 to the lender. Rs. 1000000 as principal and remaining Rs. 627440 as interest.
Total Interest Amount – 6,27,440
Total Principal Amount – 1000000
Total Paid Amount - 1627440
How to calculate EMI in MS Excel
Microsoft excel has an excellent option to calculate EMI. Below given Steps will help you to calculate the EMI for a fixed rate and term.
Step 1: Open Microsoft Excel.
Step 2: Select 'Insert' and then 'function' in MS Office 2007 we have option called Formulas, select that.
Step 3: Select category as 'financial' and look for PMT in the options displayed.
Step 4: Select PMT. This will open a function argument dialogue box.
Step 5: Enter the rate of Interest against the Rate column (if you are paying monthly installments do not forget to put the % sign after the rate and then /12)
Step 6: In the Nper column insert the number of monthly payments.
Step 7: In the Pv column enter the total amount of loan.
Step 8: Click on Ok and you have your EMI in the excel sheet.
How to calculate the rate of Interest for a given EMI in Excel
Step 1: Open the excel sheet
Step 2: Select 'insert' followed by 'function'
Step 3:Select Rate, this will open a function arguments box will open.
Step 5: Against Nper, put the total no of installments
Step 6: Against Pmt enter the given EMI. (Put a minus (-) sign before the amount)
Step 7: Against Pv enter the Loan amount