What is the Concept of EMI?


  • What is the Concept of EMI across Loans and Credit Cards?
  • How will the EMI change when an individual opts for a Balance Transfer or Part-payment facility? - Read this post to know all these and more!

If you borrow some money from a bank or financial institution, you can repay the amount via Equated Monthly Installments – commonly known as EMI. The EMI amount includes a portion of both principal and interest amount. The concept of EMI was introduced to make the repayment process smoother for borrowers.

An EMI is a fixed amount that a person needs to pay every month (on a fixed date) to clear off an outstanding loan within a fixed time frame. Simply put, the total payable amount is divided into equal amounts as per the repayment tenure chosen by borrowers. Let’s say you choose a repayment period of 5 years, so there will be 60 EMIs towards the loan repayment. EMI is available in both kinds of loans – Secured (Gold Loan, Loan Against FD, Loan Against Property, Home Loan, etc.) and Unsecured (Personal Loan). Apart from Loans, nowadays banks also offer Credit and Debit Card EMI to their customers.

You must be thinking about how the concept of EMI generally works in the case of Loans, Credit Cards and Debit Cards? Here, we will discuss the concept of EMI in detail so that you can understand better. So, let’s start!

How EMI Works in Loans?

Having some financial difficulties? Opt for a personal loan. Want to get money against your gold ornaments? Take a Gold Loan. Not enough money to purchase a home? Why not take a home loan! There are different types of loans available for different types of needs and desires of individuals. But the best part about a loan is that it can be repaid via EMIs within a fixed tenure. As we told earlier the EMI amount consists of a portion of both the principal amount and interest amount. The interest will be charged on your principal loan amount at the rate as decided by the lender. Also, the EMI will not have the same amount of principal and interest. During the initial years of your loan, the interest portion tends to be higher while in the later years, the principal portion is higher.

Interest rates vary from one loan type to another as you can get a lower interest rate in the case of a secured loan (gold loan) as compared to an unsecured loan (personal loan). Interest rates also directly affect your EMI amount. The higher the interest rate, the higher the EMI amount would be. But apart from that, there are a few more factors that affect your EMI amount – Loan Amount and Tenure.

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Let’s understand how EMI works in a loan with an example. Suppose an individual wants to borrow INR 2,00,000 against his gold ornaments with a Gold Loan for a period of 3 years. The lender fixes the interest rate on his gold loan as 12% per annum. So, what will be the amount that he will need to pay every month for the next 36 months? Let’s find out in the below table.

Gold Loan DetailsAmount
Loan AmountINR 2,00,000
Rate of Interest12% per annum
Tenure3 years (36 months)
EMI AmountINR 6,643

So, on borrowing a loan amount of INR 2 lakh at an interest rate of 12% per annum, the particular individual will need to pay an EMI of INR 6,643 every month for the next 36 months. During this period, the interest on the principal amount would be INR 39,143. To know your EMI amount for any loan facility, you can use the Loan EMI Calculator where you only need to fill in a few details and it instantly provides the EMI amount.

The formula on which Loan EMI Calculator works

If you want to do the EMI calculations manually, you can also use the formulae on which the Loan EMI calculator functions. Have a look.

EMI = [P x I x (1+I)^N]/[(1+I)^N-1]

  • Where P = Principal Loan Amount
  • I = Interest Rate per month [If the interest rate is 10% per annum, the monthly rate would be 10x(12×100)]
  • N = the number of installments

How Much Will be the EMI Amount in the case of Balance Transfer and Part Payment Facility?

Balance transfer and Part Payment Facility are two most important facilities that banks offer to their borrowers. With the Balance Transfer facility, customers can transfer their outstanding principal loan amount or credit card balance to another lender at lower interest rates. Since an individual is opting for a lower interest rate, this helps customers save on both EMI and overall interest outgo. On the other hand, with the help of a Part-payment facility, customers can pay a certain portion of the outstanding loan amount before its fixed tenure to reduce the EMI amount than before. So, you can see both the Balance Transfer and Part-payment facilities bring a certain change in the EMI amount. To understand this change, we are giving you an example for both Balance Transfer and Part-prepayment. Have a look!

Change in the EMI When You Opt for a Balance Transfer Facility

Let’s say an individual has taken a 5-year personal loan of INR 8 lakh at an interest rate of 15.99% per annum. For this loan amount, he must be paying an EMI of INR 19,450. Now, after two years (after paying 24 EMIs), he wants to opt for a Balance Transfer facility at a lower interest rate of 11.50% per annum. So, what will be the change in the EMI amount if he decides to do a Balance Transfer? Let’s find out!

So, you can see after opting for the balance transfer, the new EMI amount would be 18,246 which is around INR 1,200 lower than before. With this example, you can understand that you can reduce your EMI amount with a Balance Transfer facility. Now, let’s understand the same in the case of part payment.

Change in the EMI When You Opt for a Part Payment

Let’s say an individual has taken a 5-year personal loan of INR 8 lakh at an interest rate of 15.99% per annum. Now, after paying EMIs for 24 months, he wants to make a part payment of INR 1,75,000. What will be the change in the EMI amount due to this part payment? Let’s see it in the below table.

Loan AspectsDetails
EMI Amount for the Original Loan AmountINR 19,450
Principal Outstanding Amount at end of 2 yearsINR 5,53,315
Part-payment Amount PaidINR 1,75,000
New Principal Outstanding AmountINR 3,58,315
New EMI amountINR 12,596
Interest Outgo after Part-paymentINR 95,124
Change in the EMI amount after part paymentINR 6,854

So, after making a part-payment of INR 1,75,000, the new EMI amount that he needs to pay for the remaining tenure is INR 12,596 which is around INR 6,800 lower than before.

How EMI works in the case of a Credit Card?

Banks also provide the Credit Card EMI Facility with which customers can convert their large transactions into monthly installments. Lenders charge a certain interest on the amount you want to convert into monthly installments. The interest rates on Credit Card EMI Facility usually range from 12% – 15% per annum. But if you decide to revolve the credit amount without an EMI facility, the interest rates will be as high as 3.35% per month (40.2% per annum). With the Credit Card EMI facility, customers can choose tenure according to their convenience from 6 months to 3 years.

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To convert their big transactions into easy EMI facilities, customers can use Internet Banking, Phone Banking or they can contact their respective customer care. Banks will charge a One-time Processing Fee for Credit Card EMI Facility. To understand better, let’s see how much EMI you would need to pay on spending with your credit card!

Suppose you purchase a chain worth INR 50,000 with your HDFC Credit Card. Now, you want to convert this transaction into 12-month installments. The interest rate on this transaction is 15% per annum. So, what will be the EMI amount? Check the below table!

Transaction AspectsDetails
Total AmountINR 50,000
Rate of interest15% per annum
Tenure9 months
EMI AmountINR 4,513
Interest OutgoINR 4,155
Total Amount PayableINR 54,155

Lenders also offer a No-cost EMI facility on Credit Cards. So, when you opt for this facility, you don’t need to pay any interest on the amount you want to convert into monthly installments. The EMI will not have any interest portion. Also, customers will need to pay a one-time processing fee plus GST for this No-cost EMI facility.

How EMI works in the case of a Debit Card?

Similar to credit cards, a few lenders such as Kotak Mahindra, State Bank of India (SBI), HDFC Bank, ICICI Bank also provide the EMI Facility on Debit Cards. Customers can purchase upto a certain pre-approved limit with their debit cards and convert this transaction into easy EMIs. The interest rates on the Debit Card EMI Facility tend to change from one bank to another. Customers can also choose tenure according to their convenience.

So, let’s say you want to buy a smartphone worth INR 70,000 with your Debit Card. While buying it, choose the Debit Card EMI as your payment option. So, what will be the EMI for this transaction if you choose a tenure of 12 months and the interest rate is 16% per annum? Let’s find out!

Debit Card EMI DetailsAmount
Transaction AmountINR 70,000
Rate of Interest16% per annum
Tenure12 months
EMI AmountINR 6,351

So, for the transaction amount of INR 70,000, you will need to pay INR 6,351 for the next 12 months. Choose a tenure according to your repayment capacity. Also, the interest amount will be higher in choosing a longer tenure.

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Personal Loan Interest Rates October 2023
Fullerton India12.00% - 24.00%
HDFC Bank10.75% - 14.50%
ICICI Bank10.75% - 19.00%
IndusInd Bank10.25% - 26.00%
Kotak Bank10.99%
RBL14.00% - 23.00%
Standard Chartered Bank11.49%
Tata Capital10.50% - 24.00%
Home Loan Interest Rates October 2023
Axis Bank8.75% - 9.15%
Bank of Baroda8.50% - 10.60%
Citibank8.75% - 9.15%
HDFC8.50% - 9.40%
ICICI Bank9.00% - 9.85%
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LIC Housing8.50% - 10.50%
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PNB Housing Finance8.50% - 10.95%
Reliance Home Finance8.75% - 14.00%
State Bank of India/SBI9.10% - 9.65%
Tata Capital8.95% - 12.00%