EMI Planning - FAQ
What is EMI?
EMI (Equated Monthly Installment) is a fixed monthly payment made by a borrower to repay a loan. It includes both the principal and interest components.
In the initial months, the interest portion is higher and principle portion is low. Over time, the principal component increases and interest becomes low. This repayment structure is known as an amortization schedule.
EMIs are applicable to home loans, personal loans, vehicle loans, and such kind of other loans. Calculating EMI helps you plan your finances effectively.
EMI Calculation Formula:
EMI = [P × r × (1 + r)n] / [(1 + r)n - 1]
- P = Loan amount (Principal)
- r = Monthly interest rate (Annual Rate ÷ 12 ÷ 100)
- n = Loan tenure in months
Example:
Suppose you take a loan of at % annual interest for years ( months).
EMI = per month approximately.
Good EMI vs Bad EMI
It's wise to take a loan only when it's truly necessary-such as for education or to grow your business. Try to avoid borrowing for luxury items, as loans may help you afford them, but they rarely bring lasting happiness.
| Criteria | Good EMI | Bad EMI |
|---|---|---|
| Purpose | Used to acquire appreciating or productive assets | Used for consumption or depreciating items |
| Financial Impact | Contributes to future income, stability, or asset growth | Adds financial burden without long-term benefit |
| Interest Rates | Often lower (e.g., home or education loans) | Often higher (e.g., credit card EMIs) |
| Examples | Home loan, education loan, business loan | EMI for luxury gadgets, high-end vacations, non-essential goods |
| Asset Value | Asset may appreciate or provide return | Asset typically depreciates over time |
| Overall Benefit | Improves financial future | Reduces financial flexibility |
Why do the rich also take loans?
Even wealthy individuals and businesses often take loans—not out of necessity, but as a smart financial strategy: to earn more from the borrowed money than the interest they pay.
| Reason | Explanation |
|---|---|
| Leverage for Investment | Borrowing allows them to invest in high-return assets like real estate, stocks, or businesses. |
| Tax Efficiency | Interest on loans is often tax-deductible in many countries, lowering taxable income. |
| Liquidity Preservation | Instead of selling assets (which may incur taxes), they borrow against them. |
| Opportunity Cost | Keeping money invested helps them avoid losing potential higher returns. |
| Business Expansion | Entrepreneurs borrow to scale without giving up equity ownership. |
| Low Interest Rates | Wealthy individuals often access loans with very low interest rates. |
| Credit Score Management | They use debt strategically to maintain or improve their creditworthiness. |
Real Example:
A billionaire may borrow against their stock portfolio at 8% interest instead of selling stocks earning 12–15% annually. This helps them grow wealth while minimizing taxes.
Can I prepay or foreclose my loan?
Yes, you can usually prepay or foreclose a loan globally — but the rules, benefits, and penalties vary by country, lender, and loan type. You can check out EMI calculators HUB/loan-part-payment to estimate your prepayment options and potential interest savings.
Prepayment: Paying part of the loan early (ahead of schedule)
Foreclosure: Paying off the entire outstanding loan before the loan term ends
Benefits:
- Save on total interest paid – use our EMI calculators HUB/loan-part-payment to see how much you can save.
- Become debt-free earlier
- Improve creditworthiness
Country-wise Overview:
- India: Floating-rate loans can be prepaid without penalty. Fixed-rate loans may have small fees.
- USA: Most loans allow prepayment. Some mortgages have early payment penalties.
- UK: Loans are generally flexible. Mortgages may include early repayment charges.
- Australia: Variable-rate loans are flexible. Fixed-rate loans may involve break costs.
- Canada: Prepayment allowed with some caps. Mortgages often allow 10–20% annual prepayment.
Tips:
- Check your loan agreement for specific rules
- Ask your lender about fees or penalties
- Evaluate whether investing excess funds may offer better returns than early repayment
What is the impact of part-payment on EMI?
Part-payment refers to paying a portion of the outstanding loan principal before the scheduled time, in addition to your regular EMI.
Its impact depends on your lender’s policy and your choice:
- Reduced EMI Amount: Your monthly EMI can be lowered while keeping the loan tenure the same.
- Reduced Loan Tenure: Your EMI stays the same, but the loan gets paid off faster, saving on total interest.
- Interest Savings: Since interest is calculated on the reduced principal, you end up paying less interest over the loan period.
Note: Some lenders may charge part-payment fees or set limits on the number or amount of part-payments. Always check with your lender first.
Part-Payment vs Investment
Which is better: paying off your loan early or investing that money?
| Factor | Part-Payment of Loan | Investing in Mutual Funds |
|---|---|---|
| Interest Savings | Saves interest on loan balance | No interest saved; money is invested |
| Risk Level | Low – predictable benefit | Medium to High – market dependent |
| Liquidity | Locked into the loan | Redeemable (based on fund type) |
| Return Potential | Equal to loan interest rate (e.g. 9%) | Potentially higher (e.g. 10–15%) |
| Peace of Mind | Reduces financial stress | Wealth accumulation over time |
| Tax Benefits | May reduce deductions on loan | Capital gains or ELSS benefits |
| Impact on EMI/Tenure | Lowers EMI or tenure | No impact on existing loan |
| Flexibility | Lump sum or scheduled | SIPs or lump sum anytime |
| Goal Alignment | Best for debt reduction | Good for long-term goals |
| Recommended For | Conservative or debt-averse individuals | Investors with higher risk tolerance |
Is EMI Repayment Planning Important?
Yes, planning your EMI (Equated Monthly Installment) repayments is crucial. Here’s why:
- Predictable Cash Flow: Planning EMIs helps you manage your monthly budget efficiently by knowing your fixed outflow.
- Avoids Missed Payments: Timely planning prevents penalties, late fees, and damage to your credit score.
- Improves Credit Score: Regular EMI payments build a strong repayment history and improve future loan eligibility.
- Prevents Financial Stress: Knowing your commitments in advance reduces financial surprises and mental stress.
- Allows for Smarter Investments: Helps balance between debt repayment and savings or investment planning.
- Enables Prepayment Strategy: Clear planning allows you to make part-payments or full prepayments to reduce interest burden.
How to do EMI repayment planning?
- Assess Your Monthly Income & Expenses: Understand your financial inflow and outflow to determine your EMI affordability.
- Use EMI Calculators: – use online tool like EMI calculators HUB/loan-part-payment to see how much you can save.
- Set a Budget: Allocate a fixed portion of your income for EMI and stick to it.
- Avoid Over-Borrowing: Choose a loan amount and EMI that doesn’t exceed 40–50% of your monthly income.
- Maintain an Emergency Fund: Keep at least 3–6 months’ worth of EMI in reserve for emergencies.
- Consider Loan Tenure: Select a tenure that balances manageable EMIs and total interest payout.
- Review Regularly: Revisit your plan periodically to adjust for income changes or early repayment.
