EMI

EMI stands for Equated Monthly Instalment. It is the fixed amount you pay every month to slowly clear a loan, covering both the borrowed money and the interest. Easy EMIs feel small, but always check the total you will pay over the full term.

How an EMI is split

Each EMI has two parts: interest on what you still owe, and a bit of the loan itself, the principal. Early on, when the balance is largest, most of the EMI goes to interest and little to principal. As the balance falls, the interest share shrinks and more of the same EMI repays the loan. This is the reducing-balance method that most Indian lenders use.

Why a smaller EMI can cost more

A lower EMI almost always means a longer tenure, and a longer tenure means paying interest for more years. The monthly figure looks easier, but the total you hand over is larger. This is the single most useful thing to grasp about any loan: compare the total payable, not just the monthly amount. See it in one picture in what a loan’s tenure costs.

“No cost” and card EMIs

Turning a credit card bill or a purchase into EMIs is not always cheap. A card EMI adds a processing fee and GST, and a so-called no-cost EMI often builds the interest into the price or removes a discount you would otherwise get. Work out your own numbers in the EMI calculator, and read is no-cost EMI really free.