EMI

Equated Monthly Instalment or EMI is the fixed monthly instalment that the borrower has to pay to the financial institution or the bank throughout the time until the loan tenure gets over. This EMI is arrived at based on three important factors - amount of loan, tenure of loan and the rate of interest applicable of the loan.

From the angle of borrower, this EMI is an important deciding factor for opting for a loan. This is the sum of money that he needs to pay at least for the next decade or so. Hence, he is the best judge to evaluate whether he has the necessary repaying capacity. Lured by the possibility of a higher income in the future, borrowers should never go in for huge loan amounts which lead to high interest rates. One of the standard rules that borrower should follow is that the EMI should not be more than 40 or 45% of his net monthly salary. If at a future point of time, the income level of the borrower increases, then he can always go in for closing the loan as most of the banks do not charge exorbitant pre-closure charges.