From buying homes to buying your favorite car, bike or smartphone,
learn what is EMI and why EMIs are the most suitable payment option for you.
Equated Monthly Instalment or EMI is a very popular financial instrument. The most feasible option when it comes to transactions of high monetary value. For a middle class customer buying a nice smartphone may not burden his/her wallet but buying any car definitely will. This is where EMIs come into play. They enable users to buy any appliance, accessory or asset and not suffer the instant financial burden arising out of it.
How do EMIs work?
EMIs work in a very simple easy-to-understand manner. The user simply buys a product, pays its amount over a period of months but owns it the moment he buys it. Let us illustrate how EMIs work:
Mr. Ramesh wants to buy a new Whirlpool Washing Machine in June. The product is priced at Rs.40000. He knows that he can pay Rs.40000 in one go and it would not be much trouble for him yet he prefers to buy it on an EMI basis. This gives him the freedom of owning the product from the moment he pays the first instalment at the time of sale. Mr. Ramesh goes to the dealer, discusses the terms of the EMI and buys the machine. He bought it in the June and would pay the agreed instalment amount over the coming months (This is also discussed before the sale).
Equated Monthly Instalment – some important points
In the above example, there are a few important things to note:
- Ramesh was able to buy the washing machine by paying a lump-sum amount of Rs.40000 instead of paying it in instalments but he still bought it on EMI. Why did he do this? The reason is that EMI made it very easy for his pocket. His finances for the month of June were not affected since he only had to pay a meagre amount compared to the original price. Instead of diving into his savings, he can simply adjust the expenses. Over the next few months he would be doing the same until he pays the entire amount.
- We haven’t mentioned the period of EMI or the instalment, we did this to make sure that you understand the concept of EMI first. Since you now have an idea, let us incorporate the time period and instalment amount in examples under Types of EMIs below.
Types of EMIs
- No-Cost EMI
- Down payment EMI
- Interest EMI
- Down-Payment interest EMI
What is a No-Cost EMI?
These EMIs are the most favorable but not very common. They are most notably available on gadgets and appliances such as smartphones, refrigerators, washing machines and more. No Cost EMIs let the user buy the product without paying any interest and enable him/her to simply pay the value over a period of months. For e.g. if the iPhone 11 Pro costs Rs.90000 and you opt for a 9 month No-Cost EMI, then you can buy the same by paying instalments of Rs.10000 per month for nine months. Simple and Easy!
What is Down-payment EMI?
This is a modified version of basic EMI structure and favors the seller more than the buyer. It requires the buyer to pay in lump-sum a specific amount (usually expressed in percentage of the original value) and pay the remaining amount in instalments over a certain period. For e.g. you may be required to put a down payment equal to 20% of the value (Rs.18000) and pay the rest (Rs.72000) in instalments of Rs.6000 per month for 12 months.
What is Interest EMI?
The most common form of EMI and the one most disliked!
Humor apart, this is another type of EMI which favors the seller more than the buyer. Here, the buyer purchases the product by paying a certain amount of interest along with every instalment that is paid. E.g. let’s take the iPhone 11 pro example, the user can opt for Interest EMI and buy the mobile over a period of 9 months. But instead of paying the instalments of Rs.9000 the user will have to pay some interest on it as well. If we assume the interest to be 7%, then this means the buyer will pay Rs.9630 per month instead of Rs.9000 and after paying all the instalments, the user paid Rs.96300 in total and not Rs.90000 when compared with No-Cost EMI.
What is Down-Payment with Interest EMI?
This type of EMI combines the features of Down-Payment and Interest. In this kind of EMI, the buyer has to pay a certain amount in lumpsum towards the purchase of a product and pay the remaining amount in instalments accompanied with interest.
What is varied EMI repayment?
The amount of EMIs and the tenure of repayment may change due to a lot of reasons as mentioned below:
Types of EMI repayment
- Floating interest rate
- Progressive EMIs
- Loan prepayment
- Flat rate interest
- Reducing balance
Floating interest rate
Under this EMI type, the interest rate accompanying the EMI changes with fluctuations in market. As interest rates change in the market, the rate of EMI does as well.
Under this type of EMIs, the amount of instalment increases with increase in amount of the salary of the user. As a result, the EMI payment tenure is decreased.
Loan Prepayment EMI
EMIs can be revised. This is done in many instances such as when the buyer offers to pay a lump sum amount towards a running EMI. Here one of two things can be done, either the time period of the EMI can be reduced or the amount paid per instalment. For instance, if Mr. Ramesh bought the iPhone for Rs.90000. He paid two instalments of Rs.9000, and then paid Rs.45000 lump-sum. So, he has paid Rs.63000 in total over 3 months (9000 + 9000 + 45000) and has Rs.27000 remaining. He can choose to pay the remaining Rs.27000 over the remaining 6 months or continue paying the Rs.9000 instalment and finish the entire EMI in 3 months.
Flat Rate interest EMI
Under this type of EMI, the interest rate is calculated on the original amount. This implies that if Rs.45000 has been paid on a product costing Rs.90000, the interest will still be calculated on the original amount.
Reducing Balance method EMI
In this method, the interest is calculated on the remaining or outstanding amount. For e.g. if the user has paid Rs.45000 on a product costing Rs.90000, the interest would be calculated on the remaining Rs.45000 only.
Why do we want you to use EMI?
After the coronavirus pandemic, a lot of people across the world have suffered financially. The financial imbalance has created some major problems. To tackle these problems, a lot of people have started using EMIs. If you want to buy a new car or a home, you can buy it on EMI.
Equated Monthly Instalments enable you to own something that you haven’t even paid the full price of. This is especially helpful when it comes to work-related commodities. There is a growing demand of laptops and smartphones, as they have become vital towards the professional working of a person. Nowadays, a good laptop may cost you a fortune; laptops are priced even more than the washing machine we discussed above in Mr. Ramesh’s example. So in this case, do you think an average income person will be able to buy a Rs.70000 or Rs.80000 laptop? Quite obviously, no. It would be a huge expense for him/her. This is where EMIs help. The concerned person can easily buy the laptop costing Rs.80000 with EMI over a period of 12 months by paying approximately Rs.6700 a month.
Since EMI users become part owners of the property as and when they initiate the first instalment, they can often benefit from the rise in the value of the property. For instance, if Mr. Ramesh from the example above decides to buy an apartment worth Rs.1 crore, he can do so by paying EMI over a period of 20 years. This allows him to move in instantly and continue paying the amount as he lives the rest of his years in the apartment. When the value of the apartment rises, Mr. Ramesh can even sell it and pay off the remaining EMI and keep the proceeds from the sale of the apartment.
When considering EMIs, there is one aspect to them which is invaluable and can never be measured. That one aspect is Life stability. Money is a worry for a lot of people; EMIs do not only reduce your financial burden but they also put an end to your worries that come along with finances. Users can have multiple EMIs running on cars, homes and other necessary assets. They can continue using all of the assets knowing that they are legally theirs as long as they do not default on EMI payments.
Through this article we intended to explain What is EMI and educate users on their functioning and how users can benefit from them. If you are already an EMI user, check out our exciting offers on EMIs.