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What is EMI?

Monthly instalments offer a convenient approach to buying items without the need for an upfront lump sum.

You may have come across the term EMI, especially in the context of loans. Keep reading to learn more about EMIs and understand how payments are calculated.

What is EMI?

When you take out credit like a home loan, car loan, or personal loan, you pay back the money in Equated Monthly Instalments (EMIs). It's a small amount you pay each month until you've paid off everything. EMIs help you buy things you can't afford to pay for all at once. 

How does EMI work?

The lender adds interest to the amount borrowed. Your EMI includes both the principal and interest.

The EMI amount depends on factors like the:

  • Amount borrowed
  • Interest rate charged
  • Repayment period

You will continue your EMIs until you pay off the loan and get the NOC (no-objection certificate) from the lender. If paying the EMI for the full tenure is too difficult, consider making part payments to reduce it. But remember, there might be prepayment or foreclosure charges on the outstanding principal.

Another option is switching your loan to a lender with a lower interest rate to cut down your EMI automatically.

How is EMI calculated?

You can calculate your EMI using either the fixed-rate method or the reducing-balance method.

Fixed-rate method

Under this method, the interest rate stays the same throughout the loan period. This also means your EMI remains constant. The lender works out the interest on the borrowed amount, which is set when you borrow. 

You can calculate a fixed-rate EMI using this formula:

((P × R × N) + P )) ÷ (N × 12)

In this formula:

  • P is the principal amount or the amount you borrow
  • R is the monthly interest rate
  • N is the duration of the loan in months

Example: Suppose you borrow 2 lakh INR for two years with a fixed interest rate of 12%. By applying the fixed-rate formula, your EMI can be calculated as follows:

((2,00,000 × 12% × 2) + 2,00,000)) ÷ (2 × 12) = INR10,333

Try out our handy EMI calculator to tailor your borrowing, making it easy to manage your EMI payments.

Calculate EMI payments

Reducing-balance method

In this approach, the lenders calculate the interest rate based on the remaining loan amount after each EMI payment. This continues for the entire loan duration or until the full amount is repaid.

Initially, the EMI payment mostly covers interest, with a small amount towards the principal. Over time, more of the EMI goes towards paying off the principal amount.

You can calculate a reducing-balance EMI using this formula:

P × R × (1+R)^N ÷ [(1+R) ^ (N−1)]

In this formula:

  • P is the principal amount
  • R is the interest rate
  • N is the duration of the loan in months

EMI is a critical component of a loan. When you borrow money, it's crucial to know all about EMI loan repayments to make a smart borrowing decision.

How HSBC can help

When you're applying for a home loan with HSBC, our experts are here to guide you through calculating your EMI. Leave your details and get a call back to discuss your application. 

Benefits of Instant EMI

For a small processing fee, HSBC offers Instant EMI on loans from 3 months to 2 years. This allows you to spread your purchase repayments in Equal Monthly Instalments at your convenience and earn credit card reward points, too.

HSBC Cash-on-EMI

Looking for quick cash? Use the cash on EMI feature of your HSBC credit card to borrow and repay in monthly instalments over 36 months at a low interest rate. Apply via the HSBC India mobile banking app for swift approval and access funds with a few taps. To qualify, you must be an existing HSBC cardholder and meet eligibility criteria. Terms and conditions apply.

How to apply for cash on EMI

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