What does the financial term EMI stand for?

An equated monthly installment (EMI) refers to the fixed amount of money that you pay to a bank or lender, as part of the repayment towards an outstanding loan within a specified time period. Simply put, EMI is a facility that banks and other financial institutions provide to their customers, to borrow the loan amount for fulfilling immediate cash flow needs and then, allow them to repay it in installments. The customer is required to make these payments on a specified date every calender year. An EMI has two components - principal repayment and interest. If the principal amount is higher, the EMI will increase. The rate of interest is arrived at, based on various calculations and assessment of the borrower's credit profile.

Loan interest rates are of two types: Fixed interest rate remains unchanged throughout the loan tenure. Hence, the loan EMI remains the same. Ideally, it is suitable if the loan term is between 3 to 10 years. Floating or variable interest rate will be subject to change, depending on the market trends. The interest rates automatically change if the base rate of bank or financial institutions varies. Floating interest rate is advisable, if it is a long-term loan of 20 or 30 years.

In short, the borrower makes regular periodic repayments to the lender for many years with the purpose of retiring the loan. EMIs are especially helpful in loans, such as real estate mortgages, vehicle loans, and student loans.