When does EMI change?

In case of a pure fixed loan, the EMI due to the lender remains constant. In case of a floating rate loan, the EMI moves up or down depending on the bank's benchmark lending rate. When a lender increases the interest rate, either the tenure of the loan is increased (and EMI kept constant) or EMI is increased (and tenure kept constant).

Some banks offer their customers flexible repayment options. Here the EMIs are unequal. In step-up loans, the EMI is low initially and increases as years roll by. In step-down loans, EMI is high initially and decreases as years roll by. Stepup option is convenient for borrowers who are in the beginning of their careers and hold a tremendous growth potential. Step-down loan option is useful for borrowers who are close to their retirement years and currently make good money.

What determines EMI?

Banks arrive at EMI based on:

• Total amount borrowed,
• Tenure of the loan,
• Rate of interest and
• Computation method.

When a borrower takes a larger loan, his EMI outflow is bigger. In the current scenario of volatile rate fluctuations, it is prudent for borrowers to make as much down payment as possible. Thus, they must borrow as little as possible. EMIs are heavily tilted towards interest repayments during the initial years.

What is monthly reducing method?

Borrowers benefit more from a loan that's calculated on a monthly reducing basis than on an annual basis. In case of monthly rests, interest is computed on the outstanding principal balance for that month. The principal paid is deducted from the opening principal outstanding balance to arrive at the opening principal for the next month. In case of annual rests, principal paid is adjusted only at the end of the year. Hence, you continue to pay interest on a portion of the principal that has been paid back to the lender.

How does tenure affect cost of loan?

Longer the tenure of the loan, lesser will be your monthly EMI outflow. Shorter tenures mean greater EMI burden, but your debt clears faster. Borrowers who are in a debt trap generally increase their loan tenure. This way, their EMI burden comes down. But longer tenures can drain larger interest towards the loan and make it expensive.

What is amortisation schedule?

This is a table that gives details of the periodic principal and interest payments on a loan and the amount outstanding at any point of time. It also shows the gradual decrease of the loan balance until it reaches zero.