EMIs and Loans
- January 29, 2022
- Posted by: MvM Team
- Category: Loans
Loan
A sum of money borrowed from a bank or a financial institution or from friends or relatives, for personal use or for a specific purpose, at a rate of interest.
This money is expected to be paid back with interest within a fixed period, usually in Equated Monthly Instalments (EMIs).
Equated Monthly Instalments
Equated Monthly Instalments or EMIs are fixed payments that the borrower makes to the bank or the financial institution (lender) every month to repay the principal and interest amount against the loan.
Example: Mr. Luthra borrowed Rs10,00,000 from PNB for his personal use at 12% interest per annum for 6 months.
He is required to repay this loan to the bank in equated monthly instalments of Rs1,72,548.37 for 6 months.
Month End | EMI | Outstanding Amount | Calculations |
1 | ₹1,72,548 | ₹8,37,452 | ₹10,00,000*(1+0.01) - EMI |
2 | ₹1,72,548 | ₹6,73,278 | ₹8,37,452*(1+0.01) - EMI |
3 | ₹1,72,548 | ₹5,07,462 | ₹6,73,278*(1+0.01) - EMI |
4 | ₹1,72,548 | ₹3,39,998 | ₹5,07,462*(1+0.01) - EMI |
5 | ₹1,72,548 | ₹1,70,840 | ₹3,39,998*(1+0.01) - EMI |
6 | ₹1,72,548 | ₹0 | ₹1,70,840*(1+0.01) - EMI |
Principal
Principal is the sum of money borrowed. In the above example, Rs10,00,000 is the principal amount.
Interest
Interest is the cost of borrowing. This is the sum of money that the lender charges the borrower for extending the loan. It is expressed as a percentage of principal amount. In the above example, Rs35,290 [(Rs1,72,548*6) – Rs10,00,000] is the total interest payable by the borrower.
Repayment Schedule
Repayment schedule is a document that contains the specific terms and conditions of the loan such as EMI, break up of principal and interest component in EMI, date of payment of EMI. It also includes the total principal and interest payable over the tenure of the loan.
Foreclosure Charges or Pre-closure of Loan
Foreclosure charges or Pre-closure of loan is the penalty charged by lender on prepayment of full loan before its due date.
Collateral
When the borrower borrows money from the lender, collateral acts as a security, for repayment of the loan to the lender. It is used to minimize the risk of the lender. In extreme cases, it can be forfeited, if the borrower defaults to repay the loan.
The collateral in a home loan can be the property itself or personal assets that hold a value similar or exceeding the actual loan amount.
General Eligibility Criteria for all type of Loans
- Age: 20 to 65
- Employment: Salaried or Self-employed
- Employment stability: 3 years or more
- Income: Rs30,000 per month (min)
- CIBIL score: 750+ (preferred)
