If you’re a student planning to secure an education loan to study abroad, understanding what an EMI is and how it works would be very helpful for you. An Equated Monthly Installment or an EMI is a very common term associated with loans – whether you’re talking about home loans, personal loans, student loans, or business loans. So what is an EMI and how is it calculated? This article will help you understand everything you need to know about EMIs and how you can plan out your loan repayment process while or upon graduation.
What Are EMIs?
As mentioned earlier, an EMI is an Equated Monthly Installment that is ideally a fixed amount of money that you as a borrower will have to pay your lender to repay your loan easily. Keeping this in mind, there will be a fixed date on which you can pay your fixed amount either via cheques or via online payments on a monthly basis.
EMI Components
EMIs have 2 major components, namely:
- Principal
- Interest
The initial stages of your loan tenure are when you pay your interest amount which at that moment would be higher than your principal repayments. However, towards the end of your repayment period, a bulk of your payments will be contributed towards the principal component.
What Are The Factors That Impact Your EMIs
There are 3 major factors to consider when looking at EMIs which happen to impact/affect your payments and they include:
Loan Amount: The primary factor that determines your EMI value would be the amount you’re borrowing. This is directly proportional in the sense that the higher your loan amount is, the higher your EMI will be.
Interest Rate: Another critical factor affecting the EMIs would be the interest rate on the loans. The interest rate for your loans is calculated by the lenders based on several factors such as your income, repayment capacity, credit history, the prevailing market situation, and many more.
Can Your EMI Change During Your Tenor?
EMIs do not usually change in a regular tenor period unless there are certain situations or circumstances that may prompt your EMI to change. We’ve mentioned a few of them:
Floating Interest Rate: These types of interest rates influence your EMIs based on the market dynamics. So when the interest rates fall, do your EMI, and vice versa.
Loan Prepayment: If you prepay a certain portion of your loan amount, your EMI changes. When you prepay a certain amount, your principal amount comes down, consequently reducing your EMI.
Progressive EMIs: You have an option of paying progressive EMIs, particularly if you’ve opted for a long-term loan and if your lender agrees to it. This means that you pay a certain EMI amount initially, which can progressively increase as your salary increases. That way, you can pay off your loan faster.
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What Is A Moratorium Period?
An education loan usually comes with a moratorium period. This period usually denotes the time in which you as a borrower need not make any repayment. It was designed ideally to facilitate students to start paying upon the commencement of their earnings.
On a general note, your interest rate is calculated on a compound interest basis, but within the moratorium period, it will be calculated on a simple interest basis only.
How Can You Better Your Chances Of Lowering Your Interest Rate?
Your interest and the EMI payments are directly proportional to the interest rate your lender gives you. While your lender may have the upper hand over this variable, you can secure a great interest rate –
- if you have a guarantor with a handsome credit score
- If you’ve secured admission to a reputed college with promising job prospects to follow
Towards the end of your moratorium period, you will begin your EMI payments. As stated earlier, your interest rate post this period will be calculated based on the compound interest. To compute your monthly dues in your total outstanding amount, you simply add up the principal amount + your total simple interest. The future interest rate and the EMI amount to be paid next will be calculated using the compound interest formula.
Since this can be a complicated process to understand, it is easier to use an education loan EMI calculator to determine the monthly cost of your loan and the total interest you incur. On that note, you should know about UniCreds which is an online education loan platform that helps fuel the dreams of students who wish to study abroad by providing funding opportunities by way of education loans. If low-interest rates and collateral-free loans are what you’re looking at, this is the right place for you, and now is the perfect opportunity for you to secure a loan with UniCreds.
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