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EMI Full-Form Name: EMI Meaning
EMI Full-Form refers to the Equated Monthly Installment. EMI is a fixed amount of payment given to a lender by a borrower at a fixed date each month. The EMIs are given for paying the principal as well as the interest amounts every month. This is done by paying the loan amount completely within a specific number of years. When a borrower takes one or more loans of the most common types, he or she makes payments to the lender periodically at fixed dates. This continues for a number of years, with the goal of the repayment of the complete loan amount.
The variable payment plans are different from the EMIs. In the case of the variable plats of the payment, the borrower is given the facility to make payments of higher amounts at his or her discretion. On the other hand, in the plans pertaining to the EMIs, they can make only one payment of a fixed amount every month. The main advantage of the EMIs is that those taking loans are aware of the amount of money they will be required to pay each month towards the loan taken by them. This fact makes the process of making personal budgets much easier.
Factors determining the EMI
There are four factors form the basis of the determination of an EMI. The first factor is the principal amount: The principal amount is the actual amount of money which is being given to the borrower by the lender. This factor plays a major role in determining the EMI that will be paid by the borrower. The second factor is the rate of interest: The interest rate is the rate at which the money is borrowed from the market or an organization. The interest rate is directly proportional to the EMI. This means that if the interest rate gets high, the amount of EMI will also increase.
Hence, people who wish to obtain a loan are advised to always do a study of the numerous rates of interest being offered by the bodies lending the loans, and then only decide upon a particular loan. The third factor is the loan tenure. It is defined as the time duration for which a person has taken the loan. The amount of an EMI decreases with an increase in the loan tenure. The computation method used for calculating the EMI is an important factor which comes into play while determining the payable EMI. One such method is the Annual Reducing Method.
In this methodology, the interest rate, as well as principal, is calculated at the year’s end, although the installed is paid at each month’s end by the borrower. The main disadvantage associated with this methodology is that the interest gets paid by the borrower in that part of the principal amount the payment of which has already been made to the lender. Another method is the Monthly reducing loans. This method is most commonly used for calculating the EMI. In this method, the principal gets reduced when the borrower pays the ENO every month. The calculation of interest is done on die basis of the outstanding balance.
Floating and Fixed Rate of Interest
The calculation of the EMIs can be done either on a floating or a fixed rate of interest. A fixed-rate of interest is that interest rate that remains fixed throughout the tenure of the loan. This permanency of the rate makes the amount of the EMI constant. The fixed rate of interests must be chosen only for the cases in which the current rates are highly low, and if there is a possibility of an upward trend in the near fixture.
Now, in the case of the floating rate of interest, the rates differ depending on the market lending rates. Hence, these kinds of rates usually fluctuate. The movement of the interest rates forms the basis of the decrease or increase of the EMI. Thus, if the interest rates become higher, banks offer to increase the loan tenure at the fixed amount of EMI for those who do not wish to raise their ENE amount.